Shortrun and LongRun Average Total Cost Curves

1
Short-run and Long-Run Average Total Cost Curves
Consider the U-shaped long-run average total cost
curve (LRATC) which gives the relationship
between output and average total cost when fixed
cost has been chosen to minimize the average cost
for each level of output.
Cost per unit (/jean)
Suppose Tommie Jeans chooses the plant size
associated with producing Q five jeans. She
produces on the LRATC and on ATC5 (point C) and
her cost 6.00 per unit.
However, suppose due to a lack of demand. . .
She decreases output to Q 2 units. Notice that
her costs increase. However, she does not
produce on the LRATC (point A) and the lower cost
per unit. She still must produce on her
short-run cost curve ATC5 and its higher cost per
unit (point B).
The same outcome happens if she wishes to
increase output, because of an increase in
demand. At 8 jeans She does not produce on
ATC8, (point x) but must remain on her short-run
cost curve ATC5 . and produce at a higher
cost/unit (point Y)
In theory, Tommie has an infinite number of
possibilities when choosing the amount of her
fixed input. Lets illustrate three possible
short-run possibilities for output . . . Q 2 Q
5 Q 8
ATC5
ATC2
ATC8
B
Y
LRATC
A
X
C
Quantity of Jeans