Why do some long run average cost curves are U-shaped but some are L-shaped? Differentiate with the reasons.

The long-run average cost (LAC) curve shows the least cost per unit of producing each level of output when all factors are variable. It is also called the envelope or planning curve. Traditional theory says the LAC is U-shaped, while modern economists argue that it is L-shaped, as shown below.

Reasons for the U-shaped LAC (traditional theory), panel (a):

1. Law of returns to scale: the LAC is based on the long-run production function. In the early stage, increasing returns to scale lower the average cost, so LAC falls. Then constant returns give the minimum point. Finally, decreasing returns raise the average cost, so LAC rises. Together this produces a U shape.
2. Economies of scale (falling part): as the firm expands, internal economies in production (specialized machinery, division of labour), marketing (bulk buying and selling), management (specialized departments), and transport and storage reduce cost per unit. External economies, such as cheaper finance and shared advertising, also lower costs.
3. Diseconomies of scale (rising part): beyond the optimum size, managerial inefficiency, poor communication, labour inefficiency and lack of coordination appear. Rising input prices (external diseconomies) also push LAC upward.
4. Planning curve: the LAC envelopes all the short-run average cost curves, and its lowest point shows the optimum plant size.

Reasons for the L-shaped LAC (modern theory), panel (b):

1. Split of costs: modern theory divides total cost into production costs and managerial costs.
2. Production costs keep falling: technical economies cause production costs to fall steeply at first and then slowly. Even after the minimum optimal scale (Qm), some economies continue, such as further decentralization, lower repair costs and producing some inputs in-house.
3. Managerial costs rise only slowly: managerial costs first fall with better management techniques, and only at very large scales do they rise, and then only slowly.
4. Net effect: the fall in production costs more than offsets the slight rise in managerial costs. So the LAC falls, reaches its minimum at Qm, and then stays roughly flat instead of rising. A rational producer keeps cutting costs through new ideas, technology and resources, so this L shape is considered more realistic. Beyond Qm, the LMC lies on or below the LAC.

The differences, with reasons, are as follows: