Question

What is the long-run average cost curve? What are the three ranges of output and in what order do they occur?

Answer 1

The long run average cost curve shows the costs that the firm incurs in the period where all the costs are variable while producing a given level of output.The long run cost curve shows the minimum ATC at which the firm can produce a given level of output in the long run.

In the long run, the three ranges of output are as follows:-

Economies of scale - In this range of output, when the firm increases its output, its average costs keeps decreasing so the average cost curve keeps decreasing.

Constant returns to scale - In this range of output, as the firm increases its output, the average cost curve does not change and remains constant so the cost curve is horizontal.

Diseconomies of scale - In this range of output, as the firm increases its output, the average costs keeps increasing so the cost curve is rising in this level of output.

The order in which they occur -Economies of scale-constant returns - diseconomies of scale as when the firm increases its output, the specialization will increase efficiency and lower costs which after a certain point becomes constant after which the costs starts increasing as the maximum efficiency is achieved and the firm has become too big to manage efficienttly.