8.9 : relationship between short run and long run avg costs

• • In the short run: the firm is limited by its current plant size, so costs may be higher than the most efficient level.
  • In the long run: the firm can adjust its plant size, achieving the most efficient level of production for each output.
• Think of the LAC as a “best-case scenario” for minimizing costs across all possible short-run plant sizes.
• • The LAC curve will always touch the lowest points of the SATC curves, which represent the best possible cost for each output level.
• • In the short run, the firm’s plant size or scale is fixed, which means they face constraints on how much they can adjust inputs like machinery or labor.
  • As a result, SATC is the cost curve for a given plant size.
• • In the long run, the firm can adjust all factors of production, including plant size.
  • LAC is derived by selecting the lowest possible SATC for each level of output.
  • The LAC curve is smoother and shows the least-cost way to produce any given output in the long run, where all factors of production can be varied.