Short-run & Long-run Relationships (AQA A Level Economics)

• Day to day operations of a firm occur in the short-run
• In the long-run, they are able to plan to increase the scale of production
  • E.g by increasing the size of the factory
  • Larger scale = more output & the firm moves onto a new SRAC curve in which the average unit costs are lower
    
    
• In the long-run, a growing firm is likely to keep repeating this process,
  • Each time a more efficient SRAC is generated
    
    
• The long-run average cost curve (LRAC) is the line of best fit between the lowest points of the short-run ATC curves

The LRAC curve is generated by the addition of successive SRAC as the firm expands its scale of production

• The L-shaped long-run average cost curve is a variation of the normal long-run average cost curve and suggests that in some instances, diseconomies of scale will not cause the LRAC to turn upwards
  • In some industries, the curve may well continue to be relatively flat
• This idea results in a loosely shaped L shaped long-run cost curve (not U-shaped)

Diagram: the L-shaped Long-run Cost Curve

In some industries, it is possible to achieve a minimum efficient scale and a firm can continue to operate at this level indefinitely

Diagram analysis

• Assume a utility company spends $billions building out a new delivery network
• Their average total costs (ATC) are initially very high, but fall as they are able to gain economies of scale
• At some point, they will be operating at their lowest possible cost level (minimum efficient scale)
• They will continue operating at this level