Why the Long-Run Average Cost is curve U-shaped and flatter in the long-run? Explainwith suitable diagrams.
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Long-Run Average Cost Curve:-
In the long run, all costs of a firm are variable and in the long run the scale of operations can be altered while in the short run, it will be fixed. The factors of production can be used in varying proportion to deal with an increased output.The firm having enough long time-period, can build larger scale or type of plant to produce the anticipated output.
It is clear from the diagram that the long-run average cost curve (LAC) is tangent to all the short-run average cost curves SAC1, SAC2, SAC3, SAC4 and SAC5. The LAC curve will, therefore, be u-shaped like the short-run cost curves, but its u-shape will be less pronounced than that of the short-run cost curves. It will be flatter. In other words the long-run cost curves are flatter than the short-run cost curves. By the long period, we mean the period during which the size of the firm can be altered.
Long-run average cost curve are u-shaped as the output is increased, the cost per unit falls, then it reaches a minimum after which it starts ascending so that it takes the shape of a 'U'. The reason is that the cost curve falls on account of various economies of scale.
Why Long-run average cost curve is flatter
Long-run average cost curve is flatter in terms of fixed costs and variable costs. It is known that in the long run, no costs are fixed. all the costs are variable in the long run. In other words, the longer the period, the fewer cost will be fixed and more costs are variable. That is, in the long period, the total fixed costs can be varied.
Explanation according to the diagram:-
If the anticipated rate of output is 200 units per unit of time, the firm will choose the smallest plant. It will build the scale of plant given by SAC1 and operate at point A. This is because of the fact that the output of 200 units, the cost per unit is lowest with plant size 1, which the smallest plant of the all. As the output increases to 400 units, the size of the plant will be increased and the desired output will be attained by the scale of plant represented by SAC2. If the anticipated output is 600 units then the size of the plant built by the firm will be SAC3. When the output is 800 and 1000 units then the size of the plant built by the firm will be SAC4 and SAC5 respectively.
In the figure , the long-run average cost curve of the firm is lowest at the point 'C'. CM is the minimum cost at which optimum output 'OM', can be attained.
In the long run, all costs of a firm are variable and in the long run the scale of operations can be altered while in the short run, it will be fixed. The factors of production can be used in varying proportion to deal with an increased output.The firm having enough long time-period, can build larger scale or type of plant to produce the anticipated output.
It is clear from the diagram that the long-run average cost curve (LAC) is tangent to all the short-run average cost curves SAC1, SAC2, SAC3, SAC4 and SAC5. The LAC curve will, therefore, be u-shaped like the short-run cost curves, but its u-shape will be less pronounced than that of the short-run cost curves. It will be flatter. In other words the long-run cost curves are flatter than the short-run cost curves. By the long period, we mean the period during which the size of the firm can be altered.
Long-run average cost curve are u-shaped as the output is increased, the cost per unit falls, then it reaches a minimum after which it starts ascending so that it takes the shape of a 'U'. The reason is that the cost curve falls on account of various economies of scale.
Why Long-run average cost curve is flatter
Long-run average cost curve is flatter in terms of fixed costs and variable costs. It is known that in the long run, no costs are fixed. all the costs are variable in the long run. In other words, the longer the period, the fewer cost will be fixed and more costs are variable. That is, in the long period, the total fixed costs can be varied.
Explanation according to the diagram:-
If the anticipated rate of output is 200 units per unit of time, the firm will choose the smallest plant. It will build the scale of plant given by SAC1 and operate at point A. This is because of the fact that the output of 200 units, the cost per unit is lowest with plant size 1, which the smallest plant of the all. As the output increases to 400 units, the size of the plant will be increased and the desired output will be attained by the scale of plant represented by SAC2. If the anticipated output is 600 units then the size of the plant built by the firm will be SAC3. When the output is 800 and 1000 units then the size of the plant built by the firm will be SAC4 and SAC5 respectively.
In the figure , the long-run average cost curve of the firm is lowest at the point 'C'. CM is the minimum cost at which optimum output 'OM', can be attained.
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