Long-Run Average Cost (LRAC) Curve

What this diagram shows

The Long-Run Average Cost (LRAC) curve shows the lowest possible average cost of production for each level of output when a firm can vary all its factors of production. Unlike short-run costs where some factors are fixed, in the long run everything can be changed - factory size, machinery, workforce, etc. The curve is typically U-shaped because firms initially benefit from economies of scale (falling average costs) but eventually experience diseconomies of scale (rising average costs). This diagram is crucial for understanding optimal firm size and production decisions.

Key points

• The LRAC curve is the 'envelope' of all possible short-run average cost (SRAC) curves, showing the minimum cost for each output level
• The downward-sloping section reflects economies of scale (internal and external), where average costs fall as output increases
• The upward-sloping section shows diseconomies of scale, where coordination problems and inefficiencies cause average costs to rise
• The minimum point represents the firm's minimum efficient scale (MES) - the output level with lowest long-run average cost
• Firms can move along the LRAC curve by changing plant size and all other inputs, unlike the short-run where some factors are fixed

Exam board notes

All major exam boards treat this diagram identically, though Edexcel and CIE sometimes place slightly more emphasis on linking LRAC to market structure and barriers to entry in their mark schemes.