Long-run Average Cost (LAC)

In the long run all the factors are variable , hence all costs are variable costs. The concepts of average cost and marginal cost are the only ones relevant for the long run. The firm plans its course of action in the long run. While doing so it takes into account numerous aspects of the short run. Therefore, long run compromises of all possible short run situations The LAC envelops a number of short run average cost curves.

Features of LAC
1. 2. 3. 4. It is tangent to a number of short run average cost curves. Hence it is called as a tangent curve. It is also called as Envelope Curve as it envelops a group of short-run average cost curves relevant to different levels of output. It is also termed as the long run planning device as it indicates the least unit cost of producing each possible level of output. The cost levels represented by LAC indicate the minimum cost combinations of inputs to be used by the firm at each long-run level of output.

5.The LAC curve is less U shaped or rather dish shaped. 6.It implies that in the beginning it gradually slopes downwards and then after reaching a point it gradually begins to slope upwards.

U Shaped vs L Shaped LAC

Modern economists believe that the shape of LAC could be L shaped rather than U shaped as believed by traditional economists. The Technical Innovations and new Inventions leading to Economies may outweigh the Managerial Diseconomies arising out of expansion in production.

Learning and Cost(Learning Curve)

According to James L. Pappas and Mark Hirshey , The learning curve (also known as experience curve) phenomenon has an effect on average costs similar to that for any technological advance that provides an improvement in productive efficiency.

Learning through experience in production enables the firm to produce output more efficiently and economically at each and every level of output.

Economies of Scale Versus Learning

Cost ($ per unit of output)

Economies of Scale reversible.

A B AC1
Learning

AC2
Output