The long run average cost (LAC) curve is derived out of the short run average cost curves of the firm. The short run average cost curves are U shaped. The long run average cost curves are helpful in making a firm's output decisions; but the short run cost situations are kept in mind as well.

Therefore, the LAC curve envelops within itself a group of short run average cost (SAC) curves. Every point on the LAC is tangent with the corresponding SAC curve. Thus, an enveloped shaped LAC curve is formed.

However, it is not necessary that points on the LAC are always tangent with the minimum point of the SAC curve, when the LAC curve is falling it is tangent with the declining parts of the SAC curve.