The long-run average cost (LRAC) curve is the boundary between
attainable and unattainable levels of costs. If the firm wants to produce
output the lowest attainable cost is per unit. Thus, point is on
the LRAC curve. At point the firm has achieved the lowest possible
average cost of producing Suppose a firm is producing at and
desires to increase output to In the long run, a larger plant can be
built and the average cost of can be attained. However, in the short
run, it will not be able to vary all factors, and thus costs per unit will be
above —say, For a range of output beginning at the firm attains
its lowest possible average cost of production for the given technology
and factor prices.
The LRAC curve is determined by the firm’s current technology and by
the prices of the factors of production. It is a “boundary” in the sense that
points below it are unattainable; points on the curve, however, are
attainable if sufficient time elapses for all inputs to be adjusted. To move
from one point on the LRAC curve to another requires an adjustment in
all factor inputs, which may, for example, require building a larger factory
with more machinery.
The LRAC curve is the boundary between cost levels that are attainable, with known
technology and given factor prices, and those that are unattainable.Just as the short-run cost curves discussed in Chapter 7 relate to the
production function describing the physical relationship between factor
inputs and output, so does the LRAC curve. The difference is that in
deriving the LRAC curve there are no fixed factors of production. Since all
costs are variable in the long run, we do not need to distinguish among
Q 0 , c 0 C 0
C 1 ,
Q 1. Q 0
Q 1.
c 1
c 1 c 2. Qm,