Why is for perfectly inelastic demand/supply, the elasticity = 0?
Why is for perfectly elastic demand/supply, the elasticity = infinity?
Why does the law of diminishing marginal return explain the upward sloping part of the short run marginal cost curve but not the long run marginal cost curve? What is the difference in shape between SRMC and LRMC curves?
Thanks!
Elasticity measures the change in the quantity demanded / supplied due a change in the price. If a demand or supply curve have a elasticity of zero, it means it is perfectly inelastic because the change in quantity is zero despite the price changed importantly.
Totally contrary is with perfectly elastic demand/supply curves. A given change in price, even if it is really small, the quantity demanded / supplied suposes a inmense (infinite) change. That’s why elasticity is infinite.
Obviously, both cases are unreal, they are extremes that does not happen in the real world. However there are a lot of cases between them.
About Marginal costs.:
The SRMC shape is equal to the LRMC shape; however, the LRMC is a curve in a lower postition than the SRMC which supposes the efficiency you get by opering at an optimal size that only is feasable in the long run. Where did you read that diminishing returns theory does not apply to LRMC?
Regards.
It was in one of the questions I did. I had to choose between LRMC, SRMC, and some other irrelevant choice. The answer said SRMC is the correct answer.
Can you share the question?
The law of diminishing marginal return explains:
A. the shape of the long run average cost curve
B. the upward sloping portion of the short-run marginal cost curve
C. the upward sloping portion of the long-run marginal cost curve
The correct answer is B , it is simple because as you know that when the cost per unit of productions will increase the returns on next per unit will decreases AS WE HAVE FIXED ASSET WHICH WILL NOT CHANGE IN SHORT RUN but in long run when every input is variable then as soon as you have put a new plant to increase production you will be at new level of marginal return and marginal cost , that why answer C is not correct , then you may ask what is the end of it , The below diagram will explain the end of it , the last point that you will be at point P , before that you will always see that your long run marginal cost will decrease even when your short run Marginal return is increasing. Hope this helps
