Final answer:
Cost figures are derived from the production function and factor payments, with fixed costs predetermined in the short run. The long-run average cost curve allows for flexible fixed cost adjustments to achieve optimal production costs for various outputs.
Step-by-step explanation:
Origin of cost figures comes from the production function and the factor payments. Specifically, the costs are derived from how many units of output, such as widgets, can be produced by varying the input of labor. As presented in the discussion, the relationship between the level of fixed costs and optimal production levels is crucial. In the short run, fixed costs are constant, and the firm adjusts its variable costs. Conversely, the long-run average cost (LRAC) curve considers the entire range of outputs where both fixed and variable costs can be adjusted
For instance, different short-run average cost (SRAC) curves represent various levels of fixed costs. The LRAC curve is obtained by finding the lowest point in each SRAC curve, thus reflecting the lowest cost at which a firm can produce each output level in the long run. If a firm plans long-run production at output Q3, it should choose the fixed costs associated with SRAC3. Using SRACs with too low or too high fixed costs for Q3's production leads to higher average costs.
To summarize, cost figures derive from production functions where fixed costs are preset in the short run, influencing variable costs. Meanwhile, the long-run cost curve allows for flexibility in choosing fixed costs, optimizing the production costs for desired output levels.