Question
What is the relationship between long run Marginal cost and Long run Average cost curve? Explain the concept of long period Economic Efficiency using a diagram.
Answer :
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In microeconomics, the relationship between the long-run marginal cost (LRMC) and the long-run average cost (LRAC) curve is fundamental to understanding firm behavior and production efficiency. The LRAC curve represents the lowest possible average cost of production when all inputs are variable, and firms can adjust plant size or scale of operations. The LRMC curve, on the other hand, shows the additional cost of producing one more unit of output when all inputs are variable in the long run. The key relationship between LRMC and LRAC is that the LRMC curve always intersects the LRAC curve at the minimum point of the LRAC. This is because when LRMC is below LRAC, producing an additional unit decreases the average cost, pulling the LRAC downward. Conversely, when LRMC is above LRAC, producing an additional unit increases the average cost, pushing LRAC upward. Therefore, the intersection represents the most efficient scale of production where the firm experiences minimum long-run average cost. Long-period economic efficiency refers to a situation where resources are allocated in such a way that production occurs at the lowest possible cost, and output is produced
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