Figure 8-3 The Relationship Between the LRAC Curve and the SRATC
Curves
To every point on the LRAC curve, there is an associated SRATC curve
tangent at that point. Each short-run curve is drawn for a given plant
size, and shows how costs vary if output varies (holding constant the size
of the plant). The level of output at the tangency between each SRATC
curve and the LRAC curve shows the level of output for which the plant
size is optimal.
Each SRATC curve is tangent to the LRAC curve at the level of output for which the quantity
of the fixed factor is optimal, and lies above it for all other levels of output.The relationship between the LRAC curve and the many different SRATC
curves has a famous history in economics. The economist who is credited
with first working out this relationship, Jacob Viner, initially made a
serious mistake that ended up being published; Lessons From History
explains his mistake and shows how it illustrates an important difference
between short-run and long-run costs. Study Exercise 12 at the end of the
chapter requires you to think through and explain the relationship
between the SRATC and LRAC curves.