Civil Engineering Reference
In-Depth Information
Look at
Figure 7.4a
Here we show three short-run average cost curves for the
three (successively larger) plant sizes. Which is the optimal plant size to build? That
depends on the anticipated rate of output per unit of time. Assume for a moment
that the anticipated rate is Q
1
. If plant size 1 is built, the average costs will be C
1
.
If plant size 2 is built, we see on SAC
2
that the average costs will be C
2
, which is
greater than C
1
. So if the anticipated rate of output is Q
1
, the appropriate plant size
is the one from which SAC
1
is derived.
Note, however, what happens if the anticipated permanent rate of output per
unit of time goes from Q
1
to Q
2
. If plant size 1 has been decided upon, average costs
will be C
4
. However, if plant size 2 had been decided upon, average costs will be C
3
,
which is clearly less than C
4
.
Long-run Average Cost Curve
If we make the further assumption that during the development of a firm the
entrepreneur is faced with an infinite number of choices of plant size, then we can
envisage an infinite number of SAC curves similar to the three in
Figure 7.4a.
We are
not able to draw an infinite number, but we have drawn quite a few in
Figure 7.4b
.
Figure 7.4b
Deriving the long-run average cost curve
If we draw all the possible short-run average curves that correspond to different plant
sizes and then draw the envelope to these various curves, SAC
1
... SAC
8
, we obtain the
long-run average cost curve.
LAC
Output per unit time period
By drawing the envelope of these various SAC curves we find the
long-run
average cost curve
. To be academically precise, the long-run average cost (LAC)
curve should be wavy or scalloped, since it follows the path of the SAC curves
