Question

Average cost of production must ultimately rise when the level of output continues to expand, no matter it is related to short period production function or long period production function. Then, where is the difference between the two types of production functions?

Answer 1

In the short period production function, rise in the average cost is related to the 'diminishing returns to a factor'. In the long period production function, on the other hand, rise in the average cost is related to diminishing returns to scale.

In the short period, diminishing returns must set in when the ideal factor ratio is crossed because of the fixity of the factor. In the long period, diminishing returns must set in when diseconomies of scale start overshadowing the economies of scale.