Question

6 what causes the long run average cost curve to decline become relatively flat, and then increase? explain

Answer 1

The long run average cost curve is of 'U' Shape. The average cost decreases initially with increase in output, then it become constant for a while and again it start increasing with the increase in the output, the main reason behind this feature is economies of scale and the diseconomies of scale. Initially as the firms/businesses increases its scale of operations, it start using the modern technology/ machinery to bring out higher productivity and efficiency, thus decreasing the overall cost per unit. After a certain point there comes a constant phase at which the average cost remains same despite producing the higher outputs, but further increase in output leads to dismanagement in the organisation, also further long term cost in the form of machinery, labour wages are bound to be occur, which lead to diseconomies of scale.