Long run average cost (lac), Microeconomics

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Long Run Average Cost (or LAC)

-Constant Returns to Scale

If the input is doubled, the output will double and average cost is constant at all the levels of output.

-Increasing Returns to Scale

If the input is doubled, outputs will double and average cost decreases at all the levels of output.

-Decreasing Returns to the Scale

If input is doubled, increase in output is less than twice and the average cost increases with the output.

-In the long run:

Firms experience increasing and decreasing returns to scale and therefore long run average cost is "U" shaped.

-Long run marginal cost(LMC) leads long run average cost(LAC):

If LMC < LAC, LAC will decrease
If LMC > LAC, LAC will increase
Thus, LMC = LAC at the minimum of LAC

347_long run average cost curve.png

Question

-What is relationship between long run average cost and long run marginal cost when long run average cost is constant?

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