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The left-hand portion of the long-run average cost curve, where it is downward- sloping from output levels Q 1 to Q 2 to Q 3, illustrates the case of economies of scale. In this portion of the long-run average cost curve, larger scale leads to lower average costs. We illustrated this pattern earlier in Figure 7.9.
- References
Perez, Carlota. 2009. "Long Run Economic Transformation:...
- Problems
21.4 What Causes Changes in Unemployment over the Long Run;...
- Chapter 17
Over a sustained period of time, stocks have an average...
- Critical Thinking Questions
Critical Thinking Questions - 7.5 Costs in the Long Run -...
- Key Terms
Key Terms - 7.5 Costs in the Long Run - Principles of...
- Key Concepts and Summary
In the medium run of a few months or a few years, inflation...
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Review Questions - 7.5 Costs in the Long Run - Principles of...
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Self-Check Questions - 7.5 Costs in the Long Run -...
- References
- What Is Long-Run Average Total Cost (Lratc)?
- Understanding Long-Run Average Total Cost
- How to Visualize Long-Run Average Total Cost
- Example of Long-Run Average Total Cost
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 scale of production is changeable. The long-run average cost curve shows the lowest total cost to produce a given level of output in the long run. Long-term unit costs...
For instance, if a manufacturing company builds a new, larger plant for production, it is assumed that the LRATC per unit would eventually become lower than at the old plant as the company takes advantage of certain economies of scaleor the cost advantages that come from expanding the scale of production. When the scale of production is expanded, a...
The calculation of the LRATC may be represented as a curve showing the lowest costs that a company will be able to reach for any degree of output over time. The shape of that curve can closely resemble the curve calculated for short-run average total costs. The LRATC can be seen as made up of a series of short-run curves as a company improves its e...
For example, in the video game industry, the costs to produce a game are high. However, the cost of making copies of a game, once produced, is marginal. So, once a company can establish itself, expand the customer base for a specific game, and raise demand for that game, the extra output required to meet that demand lowers overall cost in the long ...
- Will Kenton
In such a case, the smooth curve enveloping all these short-run average cost curves is a long run average cost curve. As you can see in the figure above, the long run average cost curve is drawn tangential to all SACs. In other words, every point on the long run average cost curve is a tangent point on some SAC.
The long-run average cost curve shows the cost of producing each quantity in the long run, when the firm can choose its level of fixed costs and thus choose which short-run average costs it desires. If the firm plans to produce in the long run at an output of Q 3 , it should make the set of investments that will lead it to locate on SRAC 3 , which allows producing q 3 at the lowest cost.
- Emma Hutchinson, Emma
- 2017
The long run marginal cost (LRMC) curve relates to the LRAC curve in exactly the same way that short run marginal cost relates to a short run average cost curve. Marginal cost means the cost of producing the last unit of output, so whenever average cost is falling it follows that marginal cost must be lower than average cost, and vice versa when average cost is rising.
However, if the long-run average cost curve has a wide flat bottom like Figure 3 (b), then firms of a variety of different sizes will be able to compete with each other. The flat section of the long-run average cost curve in Figure 3 (b) can be interpreted in two different ways. One interpretation is that a single manufacturing plant producing ...
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We may now relate this expansion path to a long-run total cost (LRTC) curve. Fig. 14.7 shows the ‘least cost curve’ associated with expansion path in Fig. 14.6. This least cost curve is the long-run total cost curve. Points P,B,R and S are associated with points P’, B’, R’ and S’ on the expansion path.
