Description
The narrator discusses the differences
between short run costs and long run
costs. In particular, some short run
costs are variable and some are fixed.
In the long run, all costs are variable.
Marge learns that, for different levels
of output, there is a unique output
level that minimizes average total cost.
A line drawn through the minimum
points of each individual average total
cost curve approximates the long run
average total cost curve.
Audio Transcript
Marge: Obviously, I have too many workers in this little place. Either some of them get laid off, or I have to build a bigger restaurant.
Narrator: When Marge talks of building a bigger restaurant, she is pondering a long run decision. In the short run, Marge manages her output and costs by varying the number of workers she employs. But in the long run all inputs are variable.
Narrator: The long-run is defined as a period of time in which all inputs to production, including buildings and capital equipment, can be varied. In other words, in the long run, all costs are variable; there are no fixed costs.
Narrator: Let's consider the three stages in the growth of Ostrich Burger up to this point. For each stage, the push cart, the shack, and the quick service stand, there is an associated average total cost curve.
Narrator: The progression of the curves shows that for each facility there is an unique output level that minimizes average total cost. There is also a range of production output at which each facility operates most efficiently.
Narrator: For quantities up to 150 burgers a day, the push cart is the most efficient means of production. Between 150 and 250 burgers a day, the shack is most efficient, and at quantities over 250 burgers a day, the walk-up restaurant is most efficient.
Narrator: Analysis of these curves leads us to believe that there must be another average total cost curve representing a larger, newer facility.
Narrator: To aid Marge in her long-term planning, we draw a line that passes through the minimum points of each individual average total cost curve to approximate the long run average cost curve. This curve represents the lowest possible long run average cost of producing any given output.
--End-- Back