Derivation of LMC: Just as every point of the continuous long run average cost curve corresponds to some point of a short run average cost curve, similarly every point of the continuous long run marginal cost curve corresponds to some points on a short run marginal cost curve. LMC is related to the LAC in the same way as the SMC is related to the SAC.
If the output to be produced is OA, then in the long run it must be produced on point P on the short run average cost curve SAC1 and the long run average cost curve LAC, because only point P minimizes the cost for output OA. Corresponding to point P on SAC1 and LAC there is a point R on the short run marginal cost curve SMC1. Then AR is the relevant short run marginal cost for output OA in the long run. Therefore the point R must lie on the LMC curve corresponding to output OA. If the output OB is to be produced, SAC2 and LAC. L is also the point on SMC2 corresponding to output OB. So point L will also lie on the LMC.curves. The relationship between Similarly for output OC we get point K at which there is point SAC3 is tangent to LAC. Corresponding to point K on LAC there is a point on SMC3 is H. Therefore, H must also lie on the LMC. By joining points R, L and H we get long run marginal cost curve, LMC. The LMC curve like LAC curve is also U-shaped. It is clear from the figure that LMC is flatter than the SMCLMC and LAC is the same as that between SMC and SAC. When LMC lies below LAC then LAC is falling and when LMC lies above LAC then LAC is rising. The LMC cuts LAC at its lowest point.
0 Comments Here::
Post a Comment