Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

Economics and the 2008 crisis: a Keynesian view

Long run average cost (LRAC) curves

In the long run it is possible to change all the inputs used in production. The long run average cost curve shows the average cost for the firm at a range of different levels of output. The firm can potentially reduce costs from:

  • economies of scale
  • technological change
  • learning by doing.

The figure below summarises these three channels of cost reduction.

Described image
Figure 29 Two LRAC curves

A firm moving from point A to B is a clear example of economies of scale: average cost falls as output increases. If the firm were on LRAC 2, then moving from D to E would also be an example of economies of scale.

Note that learning by doing cannot be shown on Figure 30. All LRACs (like the curve used above) show output for a given period of time on the horizontal axis. However, learning by doing is gained from cumulative experience of production, which is gained over time, not necessarily as a result of increasing output per day or per year.

From point A to point D, the firm’s LRAC has shifted downwards, so it is an example of technological change. Note in this example, at any output the firm’s average cost is lower having shifted to LRAC 2 compared to LRAC 1.

Diseconomies of scale only occur when a firm experiences increases to average cost as output rises. This occurs on LRAC 1 as the firm moves from B to C, and on LRAC 2 as the firm moves from E to F.

Each of the LRAC curves shown have a point which identified the minimum efficient scale (MES). For LRAC 1, this is point B, and for LRAC 2, this is point E. The MES occurs at the lowest level of output where average cost is at a minimum.

DD209_1

Take your learning further371

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses372.

If you are new to university level study, we offer two introductory routes to our qualifications. Find out Where to take your learning next?373 You could either choose to start with an Access courses374or an open box module, which allows you to count your previous learning towards an Open University qualification.

Not ready for University study then browse over 1000 free courses on OpenLearn375 and sign up to our newsletter376 to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371