Question

Why do we often think of the MC curve as U-shaped?

Explain the difference between the short-run and the long-run as we define it in this module.

Answer 1

1. Why do we often think of the MC Curve as U-shaped

• MARGINAL COST CURVE: A Curve that graphically represents the relation between the marginal cost incurred by the firm in the short-run product of a good or service and the quantity of output produced.
• The Marginal Cost curve is U-shaped because initially when a firm increaes its output,total cost, as well as variable costs starts to increase at a diminishing rate. At this stage, due to economies of scale and law of diminishing returns marginal cost falls till it becomes minimum.

2. Difference between Long run and Short run

• In macroeconomics the short run is generally defined as the time horizon over which the wages and price of other inputs to production are "sticky" or inflexible, and the long run is deifned as the period of time over which these input prices have time to adjust.
• The main difference between long run and short run costs is that there are no fixed factors in the long run;
• There are both fixed and variable factors in the short run
• In the long run the general price level,contractual wages and expectations adjust fully to the state of economy