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LRAC ….. Construction and Interpretation

This piece explores the concept of Long-Run Average Cost (LRAC) in relation to construction and output costs. It delves into how LRAC varies as output increases, emphasizing the importance of plant size and input variability. The analysis includes the economic principles of economies of scale, constant returns to scale, and diseconomies of scale, demonstrating the implications of each on average costs. Through this understanding, businesses can optimize their production strategies and resource allocation to enhance efficiency and profitability.

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LRAC ….. Construction and Interpretation

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  1. LRAC ….. Construction and Interpretation

  2. Assumed as Fixed and Unchanging: • State of the Arts in technology • Resource prices

  3. COSTS OUTPUT

  4. COSTS P.S.1 ATC1 OUTPUT

  5. COST ATC AVC MC ATC AVC MC OUTPUT

  6. COST ATC AVC MC ATC AVC MC OUTPUT

  7. COSTS OUTPUT

  8. COSTS P.S.1 ATC1 OUTPUT

  9. COSTS P.S.1 ATC1 P.S.2 ATC2 OUTPUT

  10. COSTS P.S.1 ATC1 P.S.2 ATC2 P.S.3 ATC3 OUTPUT

  11. COSTS P.S.1 ATC1 P.S.2 ATC2 P.S.3 ATC3 P.S.4 ATC4 OUTPUT

  12. COSTS P.S.1 ATC1 P.S.2 ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 OUTPUT

  13. COSTS P.S.1 ATC1 P.S.2 ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 OUTPUT

  14. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 OUTPUT

  15. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 OUTPUT

  16. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 OUTPUT Q

  17. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 Q OUTPUT

  18. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 Q OUTPUT

  19. COSTS P.S.1 P.S.7 ATC1 ATC7 P.S.2 LRAC ATC2 P.S.3 ATC3 P.S.4 P.S.5 ATC5 ATC4 ATC6 OUTPUT Q

  20. LRAC shows what happens to per unit costs as we vary output by varying all inputs------ including plant size.

  21. NOT... what happens to per unit costs as we vary output within costs as we vary output by varying all inputs------ one including plant size. particular plant size.

  22. COSTS LRAC OUTPUT

  23. COSTS LRAC OUTPUT ECONOMIES OF SCALE

  24. COSTS Economies of Scale occur when per unit LRAC costs fall as we increase output by increasing plant size. OUTPUT ECONOMIES OF SCALE

  25. COSTS LRAC CONSTANT OUTPUT RETURNS TO ECONOMIES OF SCALE SCALE

  26. COSTS Constant Returns to Scale occur when per units costs remain LRAC constant as we increase output by increasing plants size. plant size. CONSTANT OUTPUT RETURNS TO ECONOMIES OF SCALE SCALE

  27. COSTS LRAC CONSTANT DISECONOMIES OUTPUT RETURNS TO ECONOMIES OF SCALE OF SCALE SCALE

  28. COSTS Diseconomies of Scale occur when per unit costs rise as we LRAC increase output by increasing plant size. CONSTANT DISECONOMIES OUTPUT RETURNS TO ECONOMIES OF SCALE OF SCALE SCALE

  29. COSTS LRAC CONSTANT DISECONOMIES OUTPUT RETURNS TO OF SCALE ECONOMIES OF SCALE SCALE

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