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  Long run Average Cost Curve

Long run Average Cost Curve (LAC):

In long-run each factors are variable. Hence the firm can modify the size of the plant (i.e., capital equipment, machinery and so on) to meet the modifications in demand. A long-run average cost curve represents the functional relationship among output and the long-run cost of production.

Long-run average cost curve:

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The Long run Average Cost (LAC) Curve depends on the supposition that in long run a firm has numerous alternatives with regard to the scale of operations. For every scale of production or plant size, the firm has a suitable short-run average cost (i.e., SAC) curve. The pattern of such short-run average cost curves is shown in figure below. We have assumed that technologically there are only three sizes of plants – small, medium & large. SAC1 is appropriate for a small size plant, SAC2 for a medium size plant and SAC3 for a big size plant. In short period, whenever the output demanded is OA; the firm will select the smallest size plant. However for an output beyond OB, the firm will select medium size plant as the average cost of small size plant is very high for similar output (i.e., JC>KC). For output beyond OD, the firm will select large size plant (i.e., SAC3). In the short-run, the firm is tied with a specified plant however in the long-run, the firm moves from one plant to the other. Since the scale of production is modified, a new plant is added. The long-run cost of production is the least possible cost of production of any specified level of output, whenever all inputs become variable, involving the size of the plant.

The long run average cost curve is termed as ‘planning curve’ of a firm as it aids in selecting a plant on the decided level of yield. The long- run average cost curve is also termed as envelope curve as it supports or envelops an assembly of short-run cost curves (figure is shown below). From the figure we can recognize that the long run average cost curve primarily drops with increase in output and subsequent to a certain point it increases making a boat shape.

 

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