Long-Run Average Cost (LRAC) represents the per-unit cost of production when all inputs are variable, helping firms understand economies of scale over time. As production scales up, the LRAC curve shows the cost behavior and helps identify the optimal size of operations to minimize costs and maximize efficiency.

Long-Run Average Cost

Per-unit cost of production

All inputs are variable

Economies of scale refer to the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. This phenomenon allows larger companies to be more competitive by reducing per-unit costs, thus potentially increasing profitability and market share.

Economies Of Scale

LRAC curve

Cost behavior refers to how a cost will change or remain stable as the level of business activity changes. Understanding cost behavior is crucial for budgeting, forecasting, and decision-making processes, as it helps businesses predict how costs will respond to changes in production volume or other operational shifts.

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