Long-Run Production Costs

Long-Run Average Total Cost (LRATC) Curve

Shows the lowest average total cost possible when a firm can change all inputs.

Envelope Curve

The LRATC is called an envelope curve because it wraps around the bottom of the short-run ATC (SRATC) curves.

Economies of Scale

LRATC declines as output increases, caused by specialization of labor, bulk purchasing of inputs, and efficient use of capital.

Diseconomies of Scale

LRATC increases as output increases, caused by coordination difficulties, bureaucratic inefficiencies, and resource limitations.

Constant Returns to Scale

When increasing production does not change LRATC, represented as a flat portion of the LRATC curve.

Minimum Efficient Scale (MES)

The smallest quantity of output at which a firm achieves the lowest long-run average total cost (LRATC).

Significance of MES in Market Structure

Firms operating at or above MES can produce efficiently; those below may struggle to compete due to higher per-unit costs.

Natural Monopoly

Occurs when a single firm can supply the entire market at a lower cost than multiple firms due to economies of scale.