#AP Microeconomics: Long-Run Costs - Your Ultimate Guide 🚀

Hey there! Let's get you prepped for the AP Microeconomics exam with a super focused review of long-run costs. We'll break it all down, connect the dots, and make sure you're feeling confident and ready to ace it!

#1. Long-Run Costs: Flexibility is Key

In the long run, everything is variable. This means firms can adjust all their inputs—plant size, equipment, labor—you name it! This flexibility lets them find the absolute lowest cost for any level of output.

#1.1. Short-Run vs. Long-Run: A Quick Recap

Short-Run: At least one input is fixed (e.g., factory size). Firms are stuck on a specific SRATC curve.
Long-Run: All inputs are variable. Firms can choose the best SRATC curve for their desired output.

#1.2. The Long-Run Average Total Cost (LRATC) Curve

The LRATC curve shows the lowest possible average total cost for each output level when all inputs are variable. It's like a roadmap to efficiency!

Key Concept

The LRATC is formed by the minimum points of all possible short-run average total cost (SRATC) curves. Each point on the LRATC represents the most efficient scale of production for that output level.

#1.3. Visualizing the LRATC

Think of it like this:

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Each blue curve represents a different plant size (SRATC).
The LRATC curve (the bold line) touches the bottom of each SRATC curve. It shows the lowest cost possible for each output level.

#1.4. Why the U-Shape?

The LRATC curve is usually U-shaped due to economies and diseconomies of scale.

Memory Aid

Think of a U-shaped curve like a smile 😊. The left side is economies of scale (costs go down), the bottom is constant returns to scale (costs stay the same), and the right side is diseconomies of scale (costs go up).

#2. Economies of Scale: Bigger Can Be Better

Economies of scale happen when a firm's average ...

Long-Run Production Costs

Paul Scott