H. Give reasons for the U shape of long run AC curve.

Summary

The long run average cost curve (LRAC) is U-shaped due to economies of scale, the law of diminishing returns, and varying input costs. Economies of scale are when firms experience lower costs from increased production output due to specialization and purchasing input factors in larger quantities. The law of diminishing returns is when increasing one input factor while holding all other input factors constant, will eventually result in a decrease in output. Lastly, input costs can vary with the quantity of inputs purchased.

Economies of Scale

Economies of scale is when firms experience lower costs from increased production output due to specialization and purchasing input factors in larger quantities. Specialization allows firms to produce the same goods more efficiently and purchasing input factors in larger quantities allows firms to receive discounts from suppliers. These two factors will lower the cost of production and cause the LRAC to decrease as output increases.

Law of Diminishing Returns

The law of diminishing returns is when increasing one input factor while holding all other input factors constant, will eventually result in a decrease in output. This is due to the fact that as more and more of one input factor is used, the marginal productivity of the input factor will eventually decrease. This will cause an increase in cost of production and cause the LRAC to increase as output increases.

Varying Input Costs

Input costs can vary with the quantity of inputs purchased. This is due to the fact that as firms purchase greater quantities of inputs, they will receive discounts from suppliers. This will cause the cost of production to decrease and cause the LRAC to decrease as output increases.

Related Questions

• What is the Long-Run Average Cost Curve (LRAC)?
• What is Economies of Scale?
• What is the Law of Diminishing Returns?
• What are Varying Input Costs?
• What causes the LRAC to decrease?
• What causes the LRAC to increase?
• How does Specialization affect the LRAC?
• How does Purchasing Input Factors in Larger Quantities affect the LRAC?
• How does Increasing One Input Factor while Holding All Other Input Factors Constant affect the LRAC?
• How does Varying Input Costs affect the LRAC?