Page 102 - F1 - AB Integrated Workbook STUDENT 2018-19
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Chapter 7
6.3 The economic behaviour of costs
The relationship between selling process and the quantity supplied or demanded is
not the only relationship explored by microeconomics. It also examines how costs
tend to vary over time.
Short term cost behaviour – in the short term, micro economists believe
that costs follow the law of diminishing returns.
As equal quantities of one variable factor of input (such as labour or materials) are
added to a fixed factor, output initially increases by a greater proportion, increasing
returns and causing the average cost per unit to fall.
However, beyond a certain point, the addition to output will begin to decrease and the
average cost per unit will start to rise again.
The short-run average total cost curve (SRATC) tends to therefore be ‘U’ shaped.
Long term cost behaviour – in the long term, all costs tend to be variable
in nature. This is because it is now possible to vary the quantities of any
factors that were fixed in the short term.
Eventually, however, as the business expands, it will tend to become less efficient
controlling costs due to poor management and pressure on supplies. This effect is
sometimes referred to as diseconomies of scale and results in the average cost of
production increasing.
This gives rise to a long-run average total cost curve (LRATC) which is broadly
similar to the SRATC.
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