Question

. Define and explain the difference between the long run and the short-run production functions. Why are short-run costs higher than costs in the long run? Why are the short-run average and marginal cost curves U shaped? What generates a U shape for the long-run average and marginal cost curves?

Answer 1

Long run production function is the one in which all the factor inputs are variable. It means quantity of every factor of production can be changed. But, on the other hand, short run production function is the one in which all the factor inputs are not variable. Means, only the labour is variable and rest of all factor of production are fixed. It means that the quantity of labour can only be changed in order to change the level of output.

Short run costs are generally higher than the long run costs because if the Firm wants to increase the level of output in the short run with only one variable factor, then the economies of scale would convert into diseconomies of scale.

Short run cost curves are U-shaped because of the returns to factor. It means initially the cost reduces because of the increase in units of labour but then after a certain period, the cost increases with an increase in the quantity of labour.

Long run production function is U-shaped because of the law of returns to scale. It means that initially with a rise in level of inputs, the cost decreases, then the cost becomes constant and then the cost increases.