Structure of Costs in the Long Run

Read this chapter. As you read and begin to understand what economies of scale are, create your own definition and see how it is similar or different from the text. In addition, focus on the diseconomies of scale to see what happens when a factory grows too quickly and becomes increasingly difficult to manage.

The Structure of Costs in the Long Run


constant returns to scale
expanding all inputs proportionately does not change the average cost of production
diseconomies of scale
the long-run average cost of producing each individual unit increases as total output increases
long-run average cost (LRAC) curve
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
production technologies
alternative methods of combining inputs to produce output
short-run average cost (SRAC) curve
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs