Can You Explain Long Run Modern Cost Curve?


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Muhammad Abdullah786 Profile
Long run modern cost concepts are classified into production costs and administrative costs. All such costs are variable in long run. As a result the long run modern costs curves are L shaped. Hence costs go on falling along with increase in output. The administrative cost may increase at a higher level of output. But the decreasing tendency of production costs is so strong that it offsets the rising tendency of administrative costs. Accordingly along with increase in production the modern long run AC curve goes on to fall.

In the beginning the production costs decrease sharply but later on they decrease slowly. As a result production cost curve is L shaped it is also because that in the beginning the firm reaps the advantage of administrative economies. But after a specific level of output when the administrative economies are attained the firms reaches the minimum optimal scale where the level of the technology remains the constant. When for the sake of more production the new technology is used. The LAC goes on to fall. Accordingly LAC curve is L shaped. Even the firm does not employ the new technology. LAC may go on to fall because of to economies at higher level of output.

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