- Long-run average cost
- The long-run average cost curve shows the lowest cost of producing each quantity of output when the firm can choose its level of fixed costs.
- Short-run average cost
- A short-run average cost curve shows average cost at each output for one specific level of fixed costs, such as one size of factory.
Regions of the long-run average cost curve
Can you name the four features of the long-run average cost curve?
Reading along the curve from left to right, each region says what happens to cost per unit as scale rises.
Economies of scale are the downward-sloping part of the curve, where larger scale leads to lower average costs.
Can you think of an example?
A bakery that moves from one oven to a production line can buy flour by the lorryload and run its machines round the clock, so each loaf costs less.
Minimum efficient scale is the lowest output at which the long-run average cost curve reaches its minimum, the smallest size at which a firm can match the lowest average cost.
Can you think of an example?
If a car plant only reaches its lowest cost per car at 200,000 cars a year, a firm planning to make 50,000 would pay more per car than its rivals.
Constant returns to scale is the flat part of the curve, where economies of scale have been exhausted and average cost changes little as scale rises or falls.
Can you think of an example?
Once a supermarket chain has a few hundred shops, opening one more barely changes its cost per sale: it simply repeats a store it already knows how to run.
Diseconomies of scale are the upward-sloping part of the curve, where a firm grows so large that it becomes difficult to manage and average costs rise.
Can you think of an example?
A firm adds layers of managers to run its many sites. Messages pass through more hands, decisions slow down and mistakes disrupt the flow of work, so each unit costs more.