Monday, April 22, 2013

Microeconomics (2068Q1): Why long-run average cost curves are 'L' shaped instead of 'U' shaped?

Normally the long-run average cost curve (LAC) is U-shaped but the empirical study has found that LAC is L-shaped. Technological progress along with sustainable production practice enable the firm to maintain the cost of production at a minimum level in the long run. This makes the LAC curve first to fall and then remain flat which makes it L-shaped. When output increases, LAC first diminishes at a faster rate and become flat as the output reaches its optimum level.

Following are the reasons that justifies long-run average cost curves are L-shaped instead of U-shaped:-

1. Specialization:

Initially workers take comparatively longer time to perform a given task but their speed increases as they are involve in the same job again and again because of the specialization.

2. Learning by Doing:

With the continuous involvement of the producer of the entrepreneur in the production, his efficiency goes on increasing i.e. his bargaining capacity, coordination etc improve and hence cost of production goes on declining.

3. Improvement in Technology:

With the passage of time, technology goes on improving which helps to reduce the cost of production sharply in the beginning and after reaching certain level, the rate of decrease in cost is insignificant.

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