Can someone clearly explain the logic of a) Marginal Costs b) Average Variable Costs c) Long & short run equilibrium How you try to remember these concepts in a simple and realistic method ? Appreciate your response.
a) The cost of producing just one more unit. b) Variable costs are things like wages or raw materials. Things which the cost depends on how many units are produced. Average variable cost is total variable costs divided by the number of units produced. c) Think in terms of the supply and demand curves. They intersect at the equilibrium price and quantity. That’s the price that producers are willing to sell, and consumers are willing to pay. That’s the market price and quantity produced. A shift in the demand or supply curve will change the intersection point - i.e. the market price and quantity (output) change. Short term equilibrium is what this change is soon after a shift. Long run equilibrium is what the final price and quantity is after the economy has had time to react to the change (improve technology, reduce expenses etc). Key point to remember is that it’s easier to change short term GDP, because it is effected by shifts in demand, supply, money supply. But long term GDP is how much the entire work force can produce… Long term GDP is much harder to change, and that’s the reason monetary and fiscal policy is often unsuccessful.
Also, the key distinction between short and long run is that in the short run, there are fixed factors of production (for example, you own a factory. in the short future, you’re stuck with only one factory, so your decisions are based on this factor being fixed.) In the long run, the factors of production are all changeable. Nothing is fixed.
Thank you, Isura & hoffmag.