Envelope Curve

Long Run Cost. Returns to Scale

Now think a bit about the long run, using the concept of average cost.

We have defined "the long run" as "a period long enough so that all inputs are variable" This includes, in particular, capital, plant, equipment, and other investments that represent long-term commitments. Thus, here is another way to think of "the long run:" it is the perspective of investment planning.

Suppose you were planning to build a new plant – perhaps to set up a whole new company – and you know about how much output you will be producing. Then you want to build your plant so as to produce that amount at the lowest possible average cost.

Here are the average cost curves for the small (AC₁), medium (AC₂) and large(AC₃) plant sizes:

If you produce 1000 units, the small plant size gives the lowest cost.

If you produce 3000 units, the medium plant size gives the lowest cost.

If you produce 4000 units, the large plant size gives you the lowest cost.

Therefore, the long run average cost (LRAC) – the lowest average cost for each output range – is described by the "lower envelope curve," shown by the thick, shaded curve that follows the lowest of the three short run curves in each range.

Дата добавления: 2014-01-11