Study Notes

Long Run Average Cost (LRAC)

AQA, Edexcel, OCR, IB

Last updated 12 Apr 2021

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

Internal economies of scale - revision video
  • 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!

Test your knowledge: MCQ increasing returns

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.