Long Run Costs & Economies of Scale

What Does Long-Run Average Total Cost - LRATC Mean?

A business measurement that represents the average cost per unit of output over the long run, where all inputs are considered to be variable.

As firms expand operations from one plant to multiple plants the average total cost per unit (ATC) to produce is reduced. This is called economies of scale--spreading out of costs over multiple plants.

In some cases a firm may have expanded too much and it has incurred a higher ATC--this is called diseconomies of scale.