What is Average Cost. Average Cost. Total Cost. =. Total Amount of Goods Produced. P1 X Q1. =. Q1. LRAC = Long Run Average Cost. Economies of Scale.
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Total Amount of Goods Produced
P1 X Q1
LRAC = Long Run Average Cost
As the producer increases his output, it gives rise to lower and lower cost until it reaches a scale of Q1 and and achieves the lowest average cost of production P1.
The idea of lowering average cost (P) as output increases is called economies of scale.
Most monopolist enjoy huge economies of scale where the cost (P) is falling over a wide range of output.
What is it that allow firms to lower their cost (P) while the increase their output? It is due to the following: