Edited by Mark Blaug and Peter Lloyd
Chapter 8: Long-run and Short-run Cost Curves
Fiona Maclachlan Cost curves form a staple part of the curriculum of undergraduate microeconomics. Their presentation across textbooks is fairly uniform and has not varied much over the years since Marshallian partial equilibrium analysis was first codified in a set of diagrams. The uniformity and stability of the presentation of the curves belies their controversial beginnings in the 1920s and 1930s, as economists struggled to contain Marshall’s realistic descriptive insights and biological analogies into a logically coherent static equilibrium model. In the battle that played out between descriptive realism and neat formalisms, the latter won out for center stage in textbook studies of cost. Cost curves are drawn with the quantity of a specific product along the horizontal axis and money cost on the vertical. For an analysis of perfect competition, the assumption is that each firm faces identical input prices and choices of technology. Under this assumption, the curves can be interpreted to correspond either to the industry as a whole, or to a representative firm. They can represent the total cost of the quantity, the average (per unit) cost, or the marginal cost. For the short run, total and average costs can be broken down into the portion reflecting the amount spent on factors of production whose quantities can be varied, and the portion reflecting the sunk costs of the fixed factors of production. Further, one can consider long-run cost curves drawn under the assumption that the quantities of all factors can be varied. Drawn together in one...
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