ECON1101 - Long Run Average Cost Curve
The Long Run Average Cost Curve
Relationship between the lowest attainable Average Total Cost and the output when both Plant Size and Labor are varied.

It is either operating as:

  1. Economy of Scale (Long Run Average Cost ↓ Output ↑)
  2. Constant Returns To Scale (Flat graph)
  3. Diseconomies of Scale. (Long Run Average Cost ↑ Output ↑)

330px-Economies_of_scale.PNG

Reasons for Economies of Scale (downwards curve)

  • Specialisation of Labor
  • Use of capital equipment
  • Bulk buying of inputs
  • Access to finance
  • Being able to afford research

Reasons for Diseconomies of Scale (upwards curve)

  • Difficulty managing large operations
  • Lack of communication
  • Scarcity of inputs
  • Duplication of effort