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What are the characteristics of LAC?

What are the characteristics of LAC?

Solution

The long-run average cost (LAC) curve shows the least possible average cost of producing each output level when all factors are variable, and its main characteristics are:

  1. Envelope (planning) curve: it encloses all the short-run average cost (SAC) curves beneath it, touching each one without cutting it, and is used to plan the best plant size.
  2. Least-cost locus and U-shape: each point on it is the minimum average cost for that output, and it is U-shaped under the law of returns to scale — falling with economies of scale, rising with diseconomies of scale (modern theory treats it as L-shaped instead).

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