Write a note on Long run average cost curve.

The short run and long run cost curves are derived from the same production function. Each curve assumes given prices for all inputs. In the long run, all inputs can be changed, in the short run some remain fixed. The LRAC curve shows the lowest cost of producing any output when all inputs are variable. Each SRATC curve shows the lowest cost of producing any output when one or more factors are held constant at some specific levels.

Output Per Period

No short run cost curves can fall below the LR curve as LRAC represents die lowest attainable cost for each possible output. As output level is changed, a different sized, plant is required to achieve the lowest attainable cost. In the figure, the SRATC curve is tangent to LRAC curve at the output for which the quantity of the fixed input is optimal SRATC curve lies above LRAC curve at all outputs except q0. It is one of the many such curves. Each curve shows how costs change as output changes, holding the fixed input at the quantity most appropriate to that output. The curves LRAC & SRAT coincide at q0, where the fixed plant is optimal for that output. For all

Output Per Period

other output levels, there is ten little or too much plant and equipment, and SRATC lies abore LRAC. If output other than qis to be sustained, costs can be reduced to the level of long run curve when sufficient time has passed to adjust the size of firms fixed capital. The output qis the minimum point on the firm’s LRAC curve. It is called the firm’s minimum efficient scale (MES), and its the output at which LR costs are minimized. The figure (B) shows a family of SRATC curves along a single LRAC curve. The LRAC curve is sometimes called an envelope curve as it encloses a series of SRATC curves by being tangent to them.

Each SRATC is tangent to the LRAC curve at the output level for which the quantity of the fixed input is optirnal,and lies abore it for all other output levels. This makes the LARAC curve the envelope of the SRATC curves.

Effect of improvement in the technology:

In the very long run innovations or advancement or improvement in technology introduce new methods of production that alter the production function. These improvement often occurs as response to changes in economic incentives such a variations is the prices of inputs and outputs. They cause cost curves to shift downwards.

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