Long-run vs. short-run production decision
1) Some inputs are fixed in the short run, but all inputs are variable inputs in the
long run, e.g. plant size or technology available is no longer fixed in the long run.
2) Firms have fixed costs in the short run, but they have no fixed costs in the long
run.
3) Firms experience diminishing marginal productivity in the short run, but not in
the long run
4) The long-run and short-run average cost curves have the same U-shape, but the
underlying causes of this shape differ. Economies and diseconomies of scale
account for the shape of the long-run average cost curve. On the other hand,
initially increasing and eventually diminishing marginal productivity accounts for
the shape of the short-run average cost curves.
Technical efficiency vs. economic efficiency
Technical efficiency means that as few inputs as possible are used to produce a
given output.
The economically efficient method of production is the method that produces a
given level of output at the lowest possible cost. That is, it is the least-cost technically
efficient process.
LRATC (long run average total cost curve). The LRAC is a locus, or collection, of
points representing the least average total cost at each output level. No short-run
average-total-cost curve can fall below the long-run average-total-cost curve. In other
words, there is an envelope relationship between long-run and short-run average
total costs. Each short-run cost curve touches the long-run cost curve at only one point