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May 27, 2021 · Long-run average total cost (LRATC) is a business metric that represents the average cost per unit of output over the long run, where all inputs are considered to be variable and the...
- Will Kenton
Long run cost is the minimal cost of producing any given level of output when all individual factors are variable. The long run cost curve helps us understand the functional relationship between out and the long run cost of production. In this article, we will look at understanding the long run average cost curve.
The long run average cost curve for a firm describes how its costs change when all of the factors of production which it employs to make its products are allowed time to vary. This is the key distinction between the long run and the short run i.e., in the short run only labor is allowed to vary because only workers can be recruited or released ...
Apr 29, 2024 · Definition of Long-Run Average Cost. Long-Run Average Cost (LRAC) is an economic concept that describes the average cost per unit of output that a firm can achieve when it adjusts all of its inputs in the long run.
- Choice of Production Technology. A firm can perform many tasks with a range of combinations of labor and physical capital. For example, a firm can have human beings answering phones and taking messages, or it can invest in an automated voicemail system.
- Economies of Scale. Once a firm has determined the least costly production technology, it can consider the optimal scale of production, or quantity of output to produce.
- Shapes of Long-Run Average Cost Curves. While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve.
- The Size and Number of Firms in an Industry. The shape of the long-run average cost curve has implications for how many firms will compete in an industry, and whether the firms in an industry have many different sizes, or tend to be the same size.
The long-run average cost (LRAC) curve shows the firm’s lowest cost per unit at each level of output, assuming that all factors of production are variable. The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output.
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Definition. The long-run average cost curve represents the per-unit cost of production when all inputs can be varied, showing how costs change as production scales up or down. This curve reflects the concept of economies and diseconomies of scale, highlighting the relationship between output levels and average costs over time.
