d) Long-run cost curves

c) relationship between short-run and long-run average cost curves

SRAC

• increases then decreases due to the law of diminishing marginal returns

• in the long run

  • all factors of production are variable

  • changes in AFC + AVC

  • curve shifts

LRAC

• increases then decreases due to economies of scale

• economies of scale

  • scale of production increases

  • input increases < output increases

  • cost of input < revenue from output

  • average costs decrease

• constant returns to scale

  • increase in inputs = increase in outputs

• diseconomies of scale

  • scale of production increases

  • input increases > output increases

  • cost of input > revenue from output

  • average costs increase