(24) Long run average total cost curve | APⓇ Microeconomics | Khan Academy

Understanding Average Total Cost

Short Run vs. Long Run

  • Short Run: Defined as the period in which at least one input is fixed. Example: The capacity of a factory or the number of food trucks.

  • Long Run: All inputs are variable, meaning you can adjust the number of factories or food trucks as needed.

Average Total Cost (ATC)

  • ATC = Average Fixed Cost (AFC) + Average Variable Cost (AVC)

  • Examined through both short-run and long-run perspectives in business scenarios.

Example: Food Truck Business

Initial Setup

  • Business Model: Operating food trucks selling tacos.

  • Target Sales: 200 tacos per day.

  • Optimal Capacity: Each food truck can optimally serve 100 tacos per day.

  • Fixed Costs: The food truck itself; variable costs include staff and supplies.

Cost Calculations

  1. Optimal Configuration:

    • For 200 tacos/day, 2 food trucks are used.

    • Cost per Taco: 50 cents (ATC).

  2. Demand Fluctuations:

    • Scenario 1: Demand drops to 100 tacos/day.

      • Keeping 2 trucks leads to a higher cost per taco: 70 cents.

    • Scenario 2: Demand rises to 300 tacos/day.

      • Keeping 2 trucks results in an even higher cost per taco: 80 cents.

Long-Run Adjustments

  • If demand is stable at 100 tacos/day:

    • Rational solution: Sell one food truck.

    • With 1 truck, at 100 tacos, cost per taco drops: 60 cents.

Short-Run Average Total Cost Curves

  • One Truck: Serves 100 tacos effectively.

  • Two Trucks: More cost-effective for serving 200 tacos.

  • Cost curves show that maintaining more trucks than necessary can lead to suboptimal cost per taco.

Meeting Increased Demand

  • If market demand increases to 300 tacos/day:

    • Add a third truck to optimize production.

    • Short-run average total cost with 3 trucks will reflect more efficient production and lower costs.

Long-Run Average Total Cost Curve

  • Connects Minimum Points of Short-Run Curves: The long-run ATC curve is derived from the lowest points of short-run ATC curves across various production levels.

  • Allows for optimal decision-making based on demand; adjusting number of trucks accordingly,

    • 100 tacos: 1 truck

    • 200 tacos: 2 trucks

    • 300 tacos: 3 trucks

  • Over time, one might adjust business operations to meet demand efficiently.

Conclusion

  • Long-run ATC curve represents the potential for cost minimization across different production scenarios by adjusting fixed inputs (like number of trucks) and capturing the essence of production flexibility.