AVC, AFC, and ATC, as we did in the short run; in the long run, there is
only one LRAC for any given set of input prices.
The Shape of the Long-Run Average Cost
Curve
The LRAC curve shown in Figure 8-1 first falls and then rises. Like the
short-run cost curves we saw in Chapter 7 , this curve is often described
as U-shaped, although empirical studies suggest it is often “saucer-
shaped.” Consider the three portions of any saucer-shaped LRAC curve.
- Decreasing Costs
Over the range of output from zero to the firm has falling long-run
average costs: An expansion of output permits a reduction of average
costs. When long-run average costs fall as output rises, the firm is said to
have economies of scale. Because the LRAC curve is drawn under the
assumption of constant factor prices, the decline in long-run average cost
occurs because output is increasing more than in proportion to inputs as
the scale of the firm’s production expands. Over this range of output, the
decreasing-cost firm is often said to enjoy long-run increasing returns
Increasing returns may occur as a result of increased opportunities for
specialization of tasks made possible by the division of labour. Even the
most casual observation of the differences in production techniques used
in large and small plants shows that larger plants use greater
specialization. These differences arise because large, specialized
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