LRAC

• Long-run


  A period of time where all factors of production are variable
• Scaling up a business

  Increasing any of the factors of production: land, labor, capital, enterprise
• Returns to scale


  The change in output when factors of production are increased
• Long-run average cost curve


  • Shaped due to returns to scale
  • Consists of many short-run positions joined together
• Parts of the long-run average cost curve

  • Increasing returns to scale
  • Constant returns to scale
  • Decreasing returns to scale
• Increasing returns to scale

  Percentage change in output is greater than percentage change in inputs
• Constant returns to scale

  Percentage change in output equals percentage change in inputs
• Decreasing returns to scale

  Percentage change in output is less than percentage change in inputs
• Numerical example of returns to scale

  • Increasing returns to scale
  • Constant returns to scale
  • Decreasing returns to scale
• Economies of scale


  Linked to increasing returns to scale
• Diseconomies of scale


  Linked to decreasing returns to scale
• Minimum efficient scale (MES)

  Lowest level of output required to exploit full economies of scale
• After MES, there are no more economies of scale, only constant returns to scale
• Alternative shapes of the long-run average cost curve

  • Bucket diagram
  • Natural monopoly
• The bucket diagram is more realistic than the alternative shape showing no constant returns
• Natural monopolies have very high fixed costs, so their long-run average cost curve is constantly downward sloping