Managerial Economics

Long-Run Average Cost and Scale

In the last chapter, we distinguished short-run demand from long-run demand to reflect the range of options for consumers. In the short run, consumers were limited in their choices by their current circumstances of lifestyles, consumption technologies, and understanding. A long-run time frame was of sufficient length that the consumer had the ability to alter her lifestyle and technology and to improve her understanding, so as to result in improved utility of consumption.

There is a similar dichotomy of short-run production decisions and long-run production decisions for businesses. In the short run, businesses are somewhat limited by their facilities, skill sets, and technology. In the long run, businesses have ...