Unformatted text preview: -the shape if the LRAC is due to economies of scale-economies of scale-costs decline as output increases-diseconomies of scale-costs increase as output increases e.g.-coordination problems-the lowest point of the ac curve is the minimum efficient scale *short run shapes are explained using the law of diminishing marginal returns, the long run shape is explained by economies of scale! How do we obtain the LRAC? q=KL k1=4, k2=8, k3=12 so, q1=4L q2=8L q3=12L each production function gives you one set of cost curves.-in the long run, you have a lot more flexibility and choices, therefore you should be able to have lower costs.-long run ac curve is below the srac curve…it forms the outer envelope(lower limit) of the sracs...
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- Fall '07
- Economics, Economics of production, average variable cost, Average Fixed Cost