| Long Run Average Cost |
Article Index for Long |
Website Links For Long |
Information AboutLong Run Average Cost |
| CATEGORIES ABOUT LONG RUN AVERAGE COST | |
| costs | |
|
The long run average cost (LRAC or LAC) curve illustrates - for a given quantity of production - the average cost per unit which a faces in the Long Run (i.e. when no Factors Of Production are fixed). LRAC curve is derived from a series of short run average cost curves. It is also called the 'envelope curve' since it envelops all the short run average cost curves. In Perfect Competition , the LRAC curve is flat, at the point of equilibrium- there are Constant Returns To Scale . Typical LRACs are U-shaped, which means that up to a certain optimum point, there are Economies Of Scale , and as production increases beyond this, there are diseconomies of scale. LRAC are generally flatter than short run average cost curve. In some industries, the LRAC is L-shaped, and economies of scale increase indefinitely. This means that the largest firm tends to have a cost advantage, and the industry tends naturally to become a monopoly, and hence is called a Natural Monopoly . Natural monopolies tend to exist in industries with high capital costs in relation to variable costs, such as Water Supply and Electricity Supply . SEE ALSO The difference between long run and short run to be understood first. |
|
|