The short-run cost curves drawn so far (such as TC, TVC, ATC and MC curves) are based on the assumption that input prices are given. Since labour is the only variable factor, it means that price, viz. wage rate has been taken to be given and constant. but if input cost or wage rate rises, then all cost curves except TFC and AFC, would shift upwards because each level of output can now be produced only at a higher cost. Thus, TC curve will become steeper, AC, AVC and MC curves will move to a higher level along the Y-axis because each quantity of output now costs more than before.
The cost curves (except TFC and AFC) will shift downwards, if productivity of the variable factor increases while its price remains unchanged. Since, now each unit of the variable factor produces more output (due to improved productivity) at the same expenditure level (as wage rates remain unchanged), TC, AVC and AC for each level of output will be lower than before, thereby shifting these curves downwards. But productivity improvements require either larger use of capital or changes in technology or improvement in workers, skills. Since, all these changes can take place only in the long-run.
SUBMIT ASSIGNMENT NOW!