Long-run average cost and economies of scale
Each plant size has a cost curve; the long-run average cost wraps them from below. Move output to see where economies of scale turn into diseconomies.
A teaching model — costs are notional; not figures for the power industry.
The boundary — bottom of long-run average cost
Each plant size has a short-run average cost curve (SAC); the long-run average cost (LAC) wraps them from below. At small output, growing lowers unit cost (economies of scale); past some point it raises it (diseconomies). Where a plant’s curve touches the long-run curve is not that plant’s own lowest point.
Plant SAC LAC LMC ● tangency ◆ SAC minimum ★ LAC minimum (LMC = LAC)
| Plant | Tangency Q | SAC minimum Q | Lowest SAC |
|---|---|---|---|
| 50 | 50 | 66.67 | 21.67 |
| 100 | 100 | 100 | 20 |
| 150 | 150 | 133.33 | 21.67 |
Model assumption: LAC = 30 − 0.2Q + 0.001Q², plant s’s SAC = LAC + 0.002(Q − s)². The envelope and the meaning of economies of scale are in the study guide; the formulas are learning supplements. Moving along the curve is economies of scale; the whole curve shifting down is learning.
Not in this calculation
- Economies of scope (several goods together)
- The expansion path and cost-minimising conditions
- Learning that lowers costs over time — mentioned only
- Minimum efficient scale of real plant and any power-industry figures
- Power-market rules such as capacity payments or SMP
Using the example values
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