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microbook_3e-page118 - available(and contract when they...

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Long-Run Average Cost Curve x The Long-Run Average Cost (LRAC) curve shows the different scales on which a firm can operate in the long-run. Each scale of operation defines a different short-run. x The Long-Run Average Cost curve of a firm: o is downward-sloping when the firm exhibits increasing returns to scale. o is upward sloping when the firm exhibits decreasing returns to scale. x The optimal scale of plant is the scale that minimizes long-run average cost. LRAC, SRAC, SRMC LRAC SRAC SRAC SRAC SRMC SRMC SRMC optimal scale decreasing returns to scale increasing returns to scale Q Long-Run Adjustments to Short-Run Conditions x In the long run, firms expand when increasing returns to scale are
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Unformatted text preview: available (and contract when they face decreasing returns to scale) . x In the long run, the market price will be driven down to the minimum point on the LRAC curve and profits go to zero. LRAC SRAC SRAC SRMC SRMC firm A firm C firm B SRAC In the short-run, firms A and B are breaking even. In the long run, firms producing at the optimal scale (like firm C) will force firms A and B to become more efficient. (Firm C can profit at lower price) . Eventually, all firms will produce at the optimal scale. Q p SR p* LRAC, SRAC, SRMC SRMC optimal scale Page 118...
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