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LONG RUN COSTS
The classification between SR, LR and VLR are to do with the four FOP's
In the short run (SR) One of your FOP's is fixed. E.g. Kebab Van Labour
In the long run (LR) Labour is now variable
In the very long run (VLR) All FOP's are now variable
We use the LRAC (long run average costs) because all FOP's are variable. This is because
there is no need to distinguish between AFC, AVC etc.
The LRAC comes off the base of each SRAC. There could be 100's. The LRAC curve is U
shaped. This cannot be due to the law of diminishing returns because we are dealing with the
long run. The U shape is because of the scale of production.
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Economies of scale: These are the benefits of producing on a large scale resulting in lower
unit costs. If nations specialise in what they are best at not only will output rise due to
comparative advantage but unit costs will fall due to economies of scale. Therefore prices
are lower and consumers are better off.
Diseconomies of scale: The negative effects of increasing the scale of production that
results in higher unit costs.…read more