The curve of long-term average costs shows the minimum values per unit of production produced at every possible volume of production. In this case, the long-term average total cost curve is made up of several sections of the short-term cost curves of companies of different sizes, which can be chosen by the company.
Explanation:
The long-term average cost curve is a curve that encircles an infinite number of short-term average total production costs curves that are in contact with it at their minimum points. The long-term average cost curve of LATS is formed from short cost curves for different volumes of production. The long-term average cost curve shows the lowest unit costs of production with which any output can be achieved, provided that the firm has time to change all factors of production.
There are three sections in the LATC curve: the first section reduces the long-term average costs, the third section increases the average prices. In the second intermediate segment, the unit costs are approximately the same, with different output values.
The arched character of a curve of long-term average costs (presence of descending and increasing sites) is explained by the effects of the scale of manufacture. The positive impact of the range of production is observed in the case when the average long-term costs of the substantial decrease in the process of increase in the volume of output.
This effect is promoted by specialization of resources and division of labor, which increases the productivity of all factors, improvement of technologies, automation of production, and specialty of management. A negative effect of the scale of production is formed when the long-term average costs grow faster than the volume of output.
That can cause it in the process of firm expansion bureaucratization of the administrative personnel amplifies, and as a result, the efficiency of manufacture gradually decreases. In a case when an increase in the scale of production does not influence the level of long-term average expenses, speak about the constant effect of the size of manufacture.