LRAC

• In the long-run, all factors of production are variable
• Scaling up a business in the long-run refers to increasing all factors of production.
• The change in output when factors of production are increased is known as returns to scale
• What is the primary determinant of the shape of the long-run average cost curve?

  Returns to scale
• The long-run consists of a series of short-run positions.
• Stages of returns to scale as depicted in the LRAC curve

  1️⃣ Increasing returns to scale

  2️⃣ Constant returns to scale

  3️⃣ Decreasing returns to scale
• Increasing returns to scale occur when the percentage change in output is greater than the percentage change in inputs
• What happens to average cost during increasing returns to scale?

  Decreases
• Decreasing returns to scale occur when output increases faster than input.

  False
• Constant returns to scale occur when the percentage change in output equals the percentage change in input
• Match the type of returns to scale with its effect on average cost:

  Increasing returns to scale ↔️ Average cost decreases

  Constant returns to scale ↔️ Average cost remains constant

  Decreasing returns to scale ↔️ Average cost increases
• To calculate percentage change, divide the difference between two numbers by the original number and multiply by 100
• What is the lowest level of output required to exploit full economies of scale?

  Minimum efficient scale
• The minimum efficient scale occurs when the LRAC curve stops decreasing.
• After the minimum efficient scale, a business experiences constant returns to scale.
• What is the shape of the long-run average cost curve for a natural monopoly?

  Downward sloping
• A natural monopoly has high fixed costs and minimizes average cost at a large output level.