Long Run Average Cost (LRAC)

What is long run average cost?

Long run average cost is the cost per unit of output feasible when all factors of production are variable

• In the long run, all costs are assumed to be variable.
• Economies of scale are the unit cost advantages from expanding the scale of production in the long run. The effect is to reduce average costs over a range of output.
• These lower costs represent an improvement in productive efficiency and can give a business a competitive advantage in a market.
• They can lead to lower prices for consumers and higher profits / dividends for shareholders.
• As long as the long run average total cost curve (LRAC) is falling, then internal economies of scale are being exploited by a business

Test your understanding of this topic with a past exam multiple choice question!