free booknotes online

Help / FAQ

Let us summarize the features of the behavior of the LAC.

LAC is also known as an envelope curve. It passes from outside the SACs.

At least one of the SACs is tangential to LAC. This is essential because the advantages available in the long run must be relevant to the respective short run possibilities. None of the SACs can ever intersect LAC. This is because of the fact that if SAC intersects LAC then some portion of SAC will lie below LAC. It would suggest some advantages that firm can enjoy in the short run are not available to it in the long run. This is absurd since LAC is a chain of SACs.

LAC is also ’U’ shaped, showing the falling, the minimum and the rising phases. It is less pronounced or flatter than SACs. This is because more factors become divisible and variable in the long run. Some of the factors may still continue to be fixed even in the long run to make it fall and rise.

LMC (like SMC) intersects LAC at the minimum point of the LAC. The reason for such behavior is similar to that in the short run.

The three phases of the LAC mark variations in the scale economies. Initially between the N1N2 points on LAC and for output levels Q1Q2 we find the falling phase of LAC. The cost decreases and the returns increase. This is the phase of Economies or increasing returns. Then at point L2 for output level Q2 LAC is almost constant. Therefore cost is constant and returns are also constant. This is the Stage of Optimum Utilization of Scale Advantages. Beyond this point between N2N3 we notice LAC rising upwards. The cost now increases and returns decreases. This is the phase of diseconomies of the scale. Under these long run conditions no further output can be advantageously produced beyond Q2. The economies of scale are at the disposal of a firm only in the long run when fixed factors become variable and replaceable.

 

**********

Index

9.1 - Concept of a Firm
9.2 - Factors of Production and Product Output
9.3 - Costs and Profits
9.4 - Costs Analysis

Chapter 10

All Contents Copyright © All rights reserved.
Further Distribution Is Strictly Prohibited.
Search:
Keywords:
In Association with Amazon.com