Long run average cost
Also called: LRAC · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Long-run average cost is cost per unit of output when all inputs can be changed: LRAC = TC / q. In the long run there is no fixed cost, so TC = TVC. LRAC is U-shaped because of returns to scale, which describe how output changes when all inputs rise together:
- increasing returns to scale: output grows faster than inputs, so LRAC falls;
- constant returns to scale: output grows at the same rate as inputs, so LRAC stays the same (at its lowest point);
- decreasing returns to scale: output grows slower than inputs, so LRAC rises.
Beyond NCERT, LRAC is the "envelope" or planning curve that wraps around all short-run average cost curves (Viner, 1931). Many real industries have an L-shaped or saucer-shaped LRAC with a long flat stretch.
Example
A cement company that builds a bigger plant may find its cost per tonne falls at first. Beyond some size, coordination problems make the cost per tonne rise again.
Don't confuse with
- Short-run average cost: includes a fixed-cost part, and its U-shape comes from the law of variable proportions, not from returns to scale.
Related concepts
- Long run marginal cost
- Economies of scale
- Internal economies of scale
- External economies of scale
- Diseconomies of scale
- Economies of scope
- Minimum efficient scale