What is the purpose of a firm's long-run average cost curve?

The long-run average cost curve refers to a graphical representation that indicates the relationship between a firm's output and the average cost. The graph assumes that the long-run cost only includes the variable costs because it is assumed that the firm has benefited from economies of scale.

The firm's long-run average cost curve indicates how the firm's variable cost increase affects its output. This information is vital to the management since it helps decide whether to increase the variable cost or decrease. When you increase the production cost, the output may double, remain constant, or decrease. Thus, with a long-run average cost curve, the management will make the best choice.