are equal to the differential of the total cost curves; and variable cost curves. Some are applicable to the short run, others to the long run. There are In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve. Profit-maximizing firms use cost curves to decide output quantities. There are various types of cost c Each STC curve can be tangent to the LRTC curve at only one point. The STC curve cannot cross (intersect) the LRTC curve. The STC curve can lie wholly “above” the LRTC curve with no tangency point. One STC curve is tangent to LRTC at the long–run cost–minimizing level of production. At the point of tangency LRTC = STC. At all other levels of production STC will exceed LRTC. Average cost functions are the total cost function divided by the level of output. Therefore, the SATC curve is also tangent to the LRATC curve at the cost-minimizing level of output. At the point of tangency LRATC = SATC. At all other levels of production SATC > LRATC To the left of the point of tangency the firm is using too much capital and fixed costs are too high. To the right of the point of tangency the firm is using too little capital and diminishing returns to labor are causing costs to increase. The slope of the total cost curves equals marginal cost. Therefore, when STC is tangent to LTC, SMC = LRMC. At the long–run cost–minimizing level of output LRTC = STC; LRATC = SATC and LRMC = SMC,. The long–run cost–minimizing level of output may be different from the minimum SATC. With fixed unit costs of inputs, if the production function has constant returns to scale, then at the minimal level of the SATC curve we have SATC = LRATC = SMC = LRMC. With fixed unit costs of inputs, if the production function has increasing returns to scale, the minimum of the SATC curve is to the right of the point of tangency between the LRAC and the SATC curves. Where LRTC = STC, LRATC = SATC and LRMC = SMC. With fixed unit costs of inputs and decreasing returns the minimum of the SATC curve is to the left of the point of tangency between LRAC and SATC, where LRTC = STC, LRATC = SATC and LRMC = SMC. With fixed unit input costs, a firm that is experiencing increasing (decreasing) returns to scale and is producing at its minimum SAC can always reduce average cost in the long run by expanding (reducing) the use of the fixed input. LRATC will always equal to or be less than SATC. If production process is exhibiting constant returns to scale then minimum SRAC equals minimum long run average cost. The LRAC and…