Characteristics of Long run Average Cost Curve

 

The following characteristics of LAC curve should be noted

  1. The LAC curve is tangential to the various SAC curves. It is drawn to cover them and is often drown as Envelope curve as no point as SAC curve can ever be below the LAC curve.
  2. The LAC curve is U-shaped of like a dish. This U-shaped of the LAC curve implies lower and lower average costs in the beginning until the optimum scale of the enterprise is reached and successively higher average costs thereafter i.e. with plants larger than that of the optimum scale.  The tendency of the long run average costs to fall as the firm expands its operation scale is a reflection of cost economies available with the increase in size, while the ultimate size in the long run curve is due largely to the eventual setting in of dis-economies of scale.     The SAC curve is also U-shaped but the difference is that LAC curve is fatter, that is U-shaped of the LAC curve will be less pronounced. This is because in the long run such economies are possible as cannot be gad in the short run.  
  3. The long average cost curve can never cut a short run curve. Though they are tangential to each other. This implies that for any given output, average cost cannot be higher in the long run than in the short-run. This is because any adjustment that will reduce costs and which it is possible to mase in the short-run con also be made in the long run. On the other side. It is not always possible in the short-run to produce a given output in the cheapest possible way.
  4. LAC curve will touch the optimum scale curve. At latter’s cost point i.e., N.
  5. LAC curve will touch SAC curve lying to the left of the optimum scale. Curve at the left of their least cost points.
  6. LAC curve will touch SAC cure laying at the right of the optimum scale curve at the right their least cost points. Thus one will find the LAC curve is tangential to the minimum cost point in optimum scale SAC and not in case of other SAC curves.

 

Term Symbol Equation Definition
Fixed cost

 

    Cost that is independent of the output level
Variable cost     Cost that varies with the output level
Total fixed cost TFC   Cost of the fixed inputs (equals sum of quantity times unit price for each fixed input)
Total variable cost TVC   Cost of the variable inputs (equals sum of quantity times unit price for each variable input)
Total cost TC TC=TFC+TVC Cost of all inputs (equals fixed costs plus variable costs
Marginal cost MC MC=DTC¸DQ Change in total cost resulting from a one-unit rise in output (Q) [equals the change in total cost divided by the change in output]
Average fixed cost AFC AFC=TFC¸Q Total fixed cost per unit of output [equals total fixed cost divided by total output]
Average variable cost AVC AVC=TVC¸Q Total variable cost per unit of output [equals total variable cost divided by total output[
Average total cost ATC or ATC=AFC+AVC Total cost per unit of output [equals average fixed cost plus average variable cost]

3 thoughts on “Characteristics of Long run Average Cost Curve”

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