Question

HOW DISCUSS THE ECONOMIC CONCEPT OF THE LONG RUN AVERAGE COST CURVE AND HOW IT CAN BE USED TO EXPLAIN RETURN TO SCALE. ONE NEEDS TO TAKE INTO ACCOUNT THE FACTORS THAT RESULT IN RETURN TO SCALE..

Answer 1

The long-run average cost (LRAC) curve is derived from the group of short-run average cost curves (SRAC), wherein each depicts one specific level for the fixed costs. In the long run no costs are fixed and all costs will be variable. LRAC would be the least expensive average cost curve for any output level. LRAC is guided with the decreasing and increasing returns to scale; and it translates the economy to the returns to scale i.e. economies of scale and diseconomies of scale. An upward-sloping LRAC depicts the diseconomies of scale, flat LRAC depicts constant returns to scale, and downward-sloping LRAC depicts economies of scale. The factors that contribute to returns to scale are the indivisibilities and specialisation of the factors of production. The indivisible factors such as financial indivisibilities, marketing indivisibilities, and research indivisibilities; helps in improving the production and reducing the cost of production, therefore increasing the profits. The specialisation with the labor division causes an increase in production and increasing return to scale