Question

Explain the shape of long-run average cost curve (LAC).

Answer 1

The long-run average cost (LAC) is the cost per unit of output when all inputs, including plant size, can be changed. It’s calculated by dividing the total cost in the long run by the quantity of output. In the long run, firms can choose the most efficient plant size for any level of production, aiming to minimize cost. Each Short-Run Average Cost (SAC) curve represents a specific plant. In the long run, since the firm can switch plant sizes, it can move from one SAC to another.

The LAC curve is generally U-shaped, but flatter than SAC curves. This means:

• LAC decreases at first as production increases, which is due to economies of scale (better use of resources).
• It reaches a minimum point, the most efficient scale of production.
• Then it rises because of diseconomies of scale (management issues, rising input costs, etc.).