Lecture Notes

Unit 2: Production Function and Its Applications

Dr. Kapil Lakhera

I have tried to make sure that these notes are clear and correct but there is always room for
improvement. Please email corrections or suggested improvements at
[email protected].
Theory of Production
The theory of production is an economic framework that explains how firms transform inputs
(resources) into outputs (goods or services) in the most efficient way. It examines the relationship
between inputs (such as labor, capital, and raw materials) and output, focusing on optimizing
production to maximize profit or minimize costs.
What is the Law of Variable Proportions?
The Law of Variable Proportions, also known as the Law of Returns to factor, is a fundamental
principle in economics that describes how the output of a production process changes as the
quantity of one input varies while other inputs are kept constant. This law is applicable in the short
run, where at least one factor of production (such as capital) is fixed.
Law of Variable Proportion (Short-run Production Function)
The Law of Variable Proportion is regarded as an important theory in Economics. It is referred to
as the law which states that when the quantity of one factor of production is increased while
keeping all other factors constant, it will result in the decline of the marginal product of that factor.
When the variable factor becomes more, it can lead to a negative value of the marginal product.
The law of variable proportion can be understood in the following way. When a variable factor is
increased while keeping all other factors constant, the total product will increase initially at an
increasing rate, it will increase at a diminishing rate and eventually, there will be a decline in the
rate of production.
Assumptions of the Law of Variable Proportion
1. It operates in the short run because the factors are categorised as variable and fixed.
2. The law is applicable to all fixed factors, including land.
3. The law of variable proportions allows for the combination of several variable units with
fixed factors.
4. This law primarily applies to the production sector.
5. It is simple to calculate the impact of a change in output caused by a change in variable
factors.
6. It is considered that after a certain point, factors of production become imperfect
substitutes for one another.
7. For this law to function, it is assumed that the state of technology would remain constant.
8. All variable factors are thought to be equally effective.

As per the law of variable proportions, the changes in TP and MP can be categorized into three
stages:
Stage 1: TP rises at an increasing rate, and MP increases.
Stage 2: TP rises at a decreasing rate, MP decreases and is positive.
Stage 3: TP falls, and MP becomes negative.
Total product
Suppose we differentiate an input and keep all the other inputs unchanged, then for different
degrees of that input, we get different degrees of output. This association between the variable
input and output, keeping all the other inputs unchanged is often referred to as the total product
(TP) of the variable input (Labour = L). This is also sometimes termed as the total return or total
physical product of the variable input. It will be helpful to elucidate the concepts of average
product (AP) and marginal product (MP). They are useful to explain the contribution of the
variable inputs to the production procedure.
Average product
The average product is explained as the output per unit of the variable input. We can calculate it
as follows:
AP = TP/L
Marginal product
The marginal product of an input is explained as the change in the output per unit of change in
the input when all the other inputs are held unchanged. When the capital is held unchanged, the
marginal product of labour is as follows:
MP = Change in output/Change in input
or
MP = ∆TP/∆L
Since the inputs cannot take the negative values, the marginal product is unexplained at zero
degrees of the employment of input. For any degree of an input, the sum of marginal products of
every foregoing unit of that input gives the total product. So, the total product is the sum of
marginal products.
The law of variable proportions can be explained with the help of the table and figure given below:
Table

Fixed Factor Variable Factor AP

TP (TP/L MP State of Production
Land Labour )
10 0 0 0 0
10 1 10 10 10
Stage I
10 2 30 15 20
(Increasing Returns)
10 3 60 20 30
10 4 80 20 20
10 5 90 18 10 Stage II
10 6 90 15 0 (Decreasing Returns)
Stage III
10 7 80 11.4 -10
(Negative Returns)
In the above table,
1. Land is considered as a fixed factor and labour is a variable factor of production.
2. As the labour is increased keeping land fixed, TP first increases at the increasing rate up to
the 3rd unit of labour and increases at a diminishing rate up to the 5th unit of labour. TP
is maximum at the 5th unit of labour and becomes stable up to the 6th units of labour and
starts to fall.
3. MP first increases, becomes maximum at the 3rd unit of labour and thereafter declines.
4. MP is zero at 6th units of labour and thereafter negative.
5. AP also increases at first, becomes maximum at the 3rd unit of labour and stable up to the
4th unit of labour, thereafter declines.
6. AP and MP are equal at the 4th unit of labour.
7. Though AP declines it never becomes zero.

1. First Stage (Stage of increasing returns to factor)

• Total product increases at an increasing rate up to a certain point and then increases but
at a decreasing rate.
• In the figure, TP is increasing at the increasing rate up to point A, increasing at a
diminishing rate thereafter. TP is maximum at C and D (constant).
• MP is increasing up to point G and then it is decreasing.
• AP is increasing up to point H, and stable up to point E.
• The first stage ends at the point E where AP and MP are equal (i.e. AP = MP)
Cause of increasing returns in the first stage

• Increase in efficiency of fixed factor

In this stage of production, the quantity of fixed factor is abundant relative to the variable
factor. When more variable factors are employed, the fixed factor is more efficiently
utilized. As such, increasing returns are achieved.
• Increase in the efficiency of a variable factor
Due to additional units of variable factors employed, at the beginning, the efficiency of the
productive capacity of the variable factor itself increases. It is due to division of labour or
specialization which helps to obtain higher productivity.

2. Second Stage (Stage of decreasing returns to factor)

• In this stage of production, the total product continues to increase at a diminishing rate
until it reaches to maximum.
• In the figure, this stage begins from the point B of the TP curve. TP is maximum at point
C and remains stable up to point D.
• In this stage AP is continuously decreasing.
• MP is also continuously decreasing and becomes zero (Point F of the figure) where the
second stage ends.
• When TP is maximum and constant, MP is zero.
Causes of decreasing returns

• Scarcity of fixed factor: the short-run amount of fixed factor cannot be changed. The
fixed factor becomes inadequate relative to the quantity of the variable factor. This results
in decreasing returns.
• Indivisibility of fixed factor: Once the optimum proportion between fixed factor and
variable factors is disturbed by a further increase in the variable factor, an indivisible factor
is being used in the wrong proportion with variable factor. So, the average product of the
variable factor diminishes which depicts diminishing returns.
• Imperfect substitutability of the factor: The fixed factor is inadequate relative to the
variable factor whose quantity cannot be increased following the varying quantities of the
other factors. This results in diminishing returns.

3. Third Stage (Stage of negative returns to factor)

• This stage begins from the point (point D in the figure) in which TP is declining.
• AP is also declining but never becomes zero and negative.
• When TP declines, MP becomes negative.
Causes of negative returns

• Inefficient utilization of variable factors

 • Overutilization of fixed factors
• Complexity of management
Which stage of production does a rational producer choose?
A rational producer does not choose the first and third stages of production. In the first stage,
there is no full utilization of fixed factors of production because TP increases at an increasing rate
and the MP of the variable factor also increases. It is possible to increase production by increasing
the quantity of variable factors. In the third stage, TP declines, AP also declines and MP becomes
negative. Therefore, a rational producer always chooses the second stage of production because
there is full utilization of resources. In this stage, both AP and MP of variable factors are
diminishing. The particular point of operation depends upon the prices of factors.
Application of the law of variable proportions

• This law especially applies to agriculture due to the following reasons:

• The agricultural operations are difficult to supervise efficiently and effectively.
• Scope of Specialization is also very limited. Agricultural operations are affected by seasonal,
environmental and natural factors like climate change, rainfall etc.
Differences between the Law of Returns to Factor and the Law of Returns to Scale:
Aspect Law of Returns to Factor Law of Returns to Scale
Definition Explains changes in output when Explains changes in output when all
one factor of production (e.g., factors of production are varied
labor or capital) is varied while proportionally.
others remain fixed.
Time Period Short-run phenomenon (at least Long-run phenomenon (all factors
one factor is fixed). are variable).
Focus Examines the impact of changing Examines the impact of changing all
one input while keeping others inputs in the same proportion.
constant.
Stages Includes three stages: Increasing Includes three possibilities:
Returns, Diminishing Returns, and Increasing Returns to Scale,
Negative Returns. Constant Returns to Scale, and
Decreasing Returns to Scale.
Example Increasing labor while keeping Doubling both labor and capital to
capital constant to observe changes see if output doubles, more than
in production. doubles, or less than doubles.
Application Relevant for firms operating in the Relevant for firms making long-term
short run with limited flexibility in production decisions and expansion
input adjustments. plans.
Graphical Typically represented as the Total Represented through Isoquants
Representation Product (TP), Marginal Product showing proportional changes in
(MP), and Average Product (AP) input and output.
curves.
Law of Returns to Scale (Long-run Production Function)
• The law of returns to scale describes the relationship between outputs and scale of inputs
in the long-run when all the inputs are increased.
• In the words of Prof. Roger Miller, “Returns to scale refer to the relationship between
changes in output and proportionate changes in all factors of production”.
• The law is implied with the assumption that all factors are variable.

Given the assumption, when all inputs are increased in unchanged proportions and the scale of
production is expanded, the effect on output shows three stages:
• Phase I- Increasing returns to scale
• Phase II- Constant returns to scale
• Phase III- Diminishing returns to scale

Three Stages of Returns to Scale

Stage 1: Increasing Returns to Scale
Increasing Returns to Scale (IRS) occurs when a firm increases all inputs (such as labor and capital)
by a certain percentage, and output increases by a greater percentage. This means that the firm
becomes more efficient as it grows in size, leading to lower average costs per unit of output.
Mathematically, if: Inputs increase by X %, Output increases by more than X %
Causes of Increasing Returns
• Specialization & Division of Labor – Larger firms can allocate tasks more efficiently,
improving productivity.
• Indivisibility of Inputs – Some inputs, like machinery and R&D, are expensive but become
more efficient when used at a larger scale.
• Bulk Purchasing Power – Firms can buy raw materials in bulk at discounted prices,
reducing per-unit costs.
• Operational Efficiency – Larger production setups may optimize logistics, reduce waste,
and improve coordination
Stage 2: Constant Returns to Scale
Constant Returns to Scale (CRS) occurs when increasing all inputs by a certain proportion leads
to an equal proportionate increase in output. In other words, if a firm doubles its inputs (labor,
capital, etc.), its output also doubles. This implies that production efficiency remains unchanged
as the scale of operation grows.
Mathematically, if: Inputs increase by X % , Output increases by X %
Causes of Constant Returns
• Efficient Resource Allocation – The firm maintains optimal use of resources without
inefficiencies or bottlenecks.
 • No Economies or Diseconomies of Scale – Unlike increasing or decreasing returns to
scale, CRS implies that neither cost savings nor inefficiencies arise from scaling production.

Stage 3: Decreasing Returns to Scale

Diminishing Returns to Scale refers to a situation in which increasing all inputs by a certain
proportion leads to a less than proportional increase in output. In other words, doubling inputs
results in less than double the output.
Mathematically, if: Inputs increase by X % , Output increases by less than X %
Causes of Decreasing Returns
• Inefficiencies in Management – As a firm grows, coordination and communication become
more complex, leading to inefficiencies.
• Limited Resources – Some resources, like land or skilled labor, may become scarce as
production expands, restricting further growth.
• Duplication of Efforts – Larger operations might result in redundant processes or slower
decision-making.
• Increased Bureaucracy – More layers of management can lead to slow responses and rigid
structures.
• Declining Productivity of Inputs – As firms expand, additional workers or machines may
not be as effective due to overcrowding or misallocation of tasks.
Practice-
1. Given the following information, find the values of Total Product, Marginal Product and
Average Product and fill in the blanks:

2. Find the values of Marginal Product and Average Product to fill in the blanks:

3. Find the values of Total Product and Marginal Product: ` `123

Theory of Cost
In a production process, cost is involved due to employment factors of production. In this regard,
it is essential to know the various types of costs a producer faces while deciding upon the
employment of factors.
Meaning of Cost
Cost may be defined as the monetary value of all sacrifices made to achieve an objective i.e. to
produce goods and services. Costs are very important in business decision-making. The cost of
production provides the floor to pricing. It helps a manager to make correct decisions, such as
what price to quote, whether to place a particular order for inputs or not whether to abandon or
add a product to the existing product line and so on.
Ordinarily, cost refers to the money expenses incurred by a firm in the production process. Cost
also included the imputed value of the entrepreneur’s resources and services, as well as the salary
of the owner-manager.
Determinants of Cost
Factors determining the cost are:
(a) Size of plant: There is an inverse relationship between size of plant and cost. As the size of a
plant increases, the cost falls and vice versa.
(b) Level of Output: There is a direct relationship between output level and cost. More the level
of output, more is the cost ( i. e., total cost) and vice Versa.
(c) Price of Inputs: There is a direct relationship between price of inputs and cost. As the price of
inputs rises, the cost rises and vice versa.
(d) State of technology: More modern and upgraded technology implies lesser cost and vice versa.
(e) Management and administrative efficiency: Efficiency and cost are inversely related. More the
efficiency in management and administration better will be the product and less will be the cost.
The cost will increase in case of inefficiencies in management and administration.

Cost Concept
The concept of cost is central to business decision-making. To make effective business decisions,
the business manager needs to be aware of several cost concepts and their respective uses.
Actual cost
Actual cost means the actual expenditure incurred on producing goods and services. Value of raw
materials, wages, rent, salaries paid and interest on borrowed capital etc. are some of the examples
of the actual cost. Actual cost is also known as absolute cost or out lay cost or money cost.
Opportunity Cost
The opportunity cost is measured in terms of the forgone benefits from the next best alternative
use of a given resource. For example, the inputs which are used to manufacture a car may also be
used in the production of military equipment. The main points of opportunity cost are:

1. The opportunity cost of any commodity is only the next best alternative forgone.
2. The next best alternative commodity that could be produced with the same value of the factors,
which are more or less the same.
3. It helps in determining relative prices of factor inputs at different places.
4. It helps in determining the remuneration to services.
5. It helps the manager to decide what he should produce in the factory.
Explicit cost
An explicit cost is a cost that is directly incurred by the firm, company or organization during the
production. The explicit cost is kept on record by the accountant of the firm. Salaries, wages, rent,
and raw materials are a few examples of the explicit cost. The explicit cost is also known as out-
pocket cost. This cost is handy in calculating both accounting and economic profit.
Implicit cost
The implicit cost is directly opposite to it, as it is the cost that is not directly incurred by the firm
or company. In implicit cost outflow of cash doesn’t take place. It is not in the record and is heard
to be traced back. The interest on owner’s capital or the salary of the owner are the prominent
example of the implicit cost. The implicit cost is also known as imputed cost. Through implicit
cost , only the economic profit is calculated.
Incremental cost
Incremental costs are the added costs of a change in the level of production or the nature of
activity. It may be adding a new product or changing distribution channel, or adding new
machinery, etc. It appears to be similar to marginal cost, but it is not managerial cost. Marginal
cost refers to the cost of added unit of output.
Sunk Cost
Sunk costs are costs which cannot be altered in any way. Sunk costs are costs which have already
been uncured. For example, the cost incurred in constructing a factory. When the factory building
is constructed, costs have already been incurred. The building has to be used for which originally
envisaged. It cannot be altered when operations are increased or decreased. Investment of
machinery is an example of sunk cost.
Shutdown cost
Shutdown cost are those cost which would be incurred in the event of suspension of plant
operations and which could be saved if operations were continued. For example, cost of sheltering
the plant equipment and construction of sheds for protecting the exposed property, or fixed cost
and maintenance cost etc.
Abandonment cost
Abandonment costs are those costs which are incurred for the complete removal of the fixed asset
from use. These may occur due to obsolesce or due to improvisation of the firm. Abandonment
costs thus involve a problem of disposal of the asset.

Book cost
Book costs are business costs which don’t involve any cash payment being made but a provision
is made in the books of accounts to include them in the profit and loss account and take tax
advantages.
Past cost
Past costs are actual costs incurred in the past. These costs are mentioned in the financial accounts.
, since the past costs have already been incurred, and there is no scope for managerial decision. If
the management finds out that the past costs are excessive, it cannot do anything to rectify it now.
Future cost
Future costs are those costs which are to be incurred soon. This is only a forecast. Future costs
matter for managerial decisions because the management can evaluate the desirability of that
expenditure. In the case of future costs, if the management considers them very high , it can either
reduce them or postpone the use of them.
Direct cost
Direct costs are related to a specific process or product. They are also called traceable costs as we
can directly trace them to a particular activity, product or process. They can vary with changes in
the activity or product. Examples of direct costs include manufacturing costs relating to
production, customer acquisition costs of sales, etc.
Indirect cost
Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or
component of the business. For example, an increase in charges of electricity or taxes payable on
income. Although we cannot trace indirect costs, they are important because they affect overall
profitability.
Fixed Cost
Fixed cost are the amount spent by the firm on fixed inputs in the short run. Fixed cost are thus,
those costs which remain constant, irrespective of the level of output. These costs remain
unchanged even if the output of the firm is nil. Fixed costs therefore, are known as Supplementary
costs or Overhead costs.

Variable Cost
Variable costs are those cost that change directly as the volume of output changes. As the
production increases variable cost also increases, and as the product decreases variable costs also
decreases, and when the production stops variable cost is zero.
Semi Variable Cost
This type of cost lies in between fixed and variable cost. It is neither perfectly variable nor perfectly
fixed in relation to changes in output. This type of costs include a portion of fixed cost and a
portion of variable cost, this is known as semi variable cost. For example- electricity bill generally
include both a fixed charge (meter rent) and a variable charge(charge based on units consumed)
and the total payment made is semi variable cost.

Stair Step Cost

Certain expenses increase in a stair step manner, i.e. remaining constant over a range of
output but rising suddenly to a new higher level as output passes beyond. The given level.
For example- up to a point the attendants salary may remain fixed as output increases but
beyond that point further increase in output may require an additional attendant leading to a
sudden jump in supervision expenses.
Total cost
Total cost is the expenditure incurred in producing goods and services.
TC= TFC+TVC
Average cost
Average cost is not actual cost, It is obtained by dividing the total cost by the total output.
AC= Total Cost/Units Produced
Marginal cost
The cost incurred on producing one additional unit of commodity is known as marginal cost. Thus
it shows a change in total cost when one more or less unit is produced.
MC= TCn – TC(n-1)
Cost function
The cost-output relationship plays an important role in determining the optimum production level.
TC=F(Q)
Where,
TC= Total cost
Q= Quantity produced
F= Function
The cost function can be classified as:
Short run cost
The short run is a period where the time is too short to expand the size of the industry and the
increased demand has to be met within the existing size of the industry because certain factors
cannot be changed in the short run. So short-run costs are those which vary with output when
fixed plant a capital equipment remain unchanged.
Long run costs
In the long run the size of an industry can be expanded to meet the increased demand for products
such as in long run all the factors of production can be increased according to need. Hence long
run costs are those which vary with output when all input factors including plants equipment vary.
Cost output relationship in the short run
In the short run, a change in output is possible only by making changes in the variable inputs like
raw materials, labour etc. Inputs like land and buildings, plant and machinery etc. are fixed in the
short run. It means that the short period is not sufficient enough to expand the quantity of fixed
inputs.
Thus, Total Cost (TC) in the short run is composed of two elements –
Total Fixed Cost (TFC)
Total Variable Cost (TVC)
TFC remains the same throughout the period and is not influenced by the level of activity. The
firm will continue to incur these costs even if the firm is temporarily shut down. Even though
TFC remains the same fixed cost per unit varies with changes in the level of output.
On the other hand, TVC increases with an increase in the level of activity and decreases with a
decrease in the level of activity. If the firm is shut down, there are no variable costs. Even though
TVC is variable, variable cost per unit is constant.
So in the short-run, an increase in TC implies an increase in TVC only. Thus:
TC = TFC + TVC
TFC = TC – TVC
TVC = TC – TFC
TC = TFC when the output is zero.

The graph below shows Short-run cost-output relationship.

In the graph X-axis measures output and the Y-axis measures cost. TFC is a straight line parallel
to the X-axis because TFC does not change with an increase in output.
TVC curve is upward rising from the origin because TVC is zero when there is no production and
increases as production increases. The shape of the TVC curve depends upon the productivity of
the variable factors. The TVC curve above assumes the Law of Variable Proportions, which
operates in the short-run.
TC curve is also upward rising not from the origin but from the TFC line. This is because even if
there is no production the TC is equal to TFC.
It should be noted that the vertical distance between the TVC curve and TC curve is constant
throughout because the distance represents the amount of fixed cost which remains constant.
Hence TC curve has the same pattern of behavior as TVC curve.

Short-run Average Cost and Marginal Cost

The concept of cost becomes more meaningful when they are expressed in terms of per-unit cost.
Cost per unit can be computed concerning fixed cost, variable cost, total cost and marginal cost.
The following Table and diagram illustrate cost output relationship in the short run, with reference
to different concepts of cost.
Average Fixed Cost (AFC): Average fixed cost is obtained by dividing the TFC by the number
of units produced. Thus:
AFC = TFC/Q
where ‘Q’ refers quantity of production. Since TFC is constant for any level of activity, fixed cost
per unit goes on diminishing as output goes on increasing. The AFC curve is downward sloping
towards the right throughout its length, with a steep fall at the beginning.
Average Variable Cost (AVC): Average Variable Cost is obtained by dividing the TVC by the
number of units produced. Therefore:
AVC = TVC / Q
Due to the operation of the Law of Variable Proportions, the AVC curve slopes downwards till it
reaches a certain level of output and then begins to rise upwards.
Average Total Cost (ATC): Average Total Cost or simply Average Cost is obtained by dividing
the TC by the number of units produced. Thus:
ATC = TC / Q
The ATC curve is very much influenced by the AFC and AVC curves. In the beginning, both the
AFC curve and AVC curve decline and therefore ATC curve also declines. The AFC curve
continues the trend throughout, though at a diminishing rate. AVC curve continues the trend till
it reaches a certain level and thereafter it starts rising slowly. Since this rise initially is at a rate lower
than the rate of decline in the AFC curve, the ATC curve continues to decline for some more time
and reaches the lowest point, which is further than the lowest point of the AVC curve. Thereafter
the ATC curve starts rising because the rate of rise in the AVC curve is greater than the rate of
decline in the AFC curve.
Marginal Cost (MC): Marginal Cost is the increase in TC as a result of an increase in output by
one unit. In other words, it is the cost of producing an additional unit of output.
MC = ∆TC / ∆Q
MC is based on the Law of Variable Proportions. A downward trend in the MC curve shows
decreasing marginal cost (i.e. increasing marginal productivity) of the variable input. Similarly, an
upward trend in the MC curve shows increasing marginal cost (i.e. decreasing marginal
productivity). MC curve intersects both AVC and ATC curves at their lowest points.
The relationship between AVC, AFC, ATC and MC can be summed up as follows.
1. If both AFC and AVC fall ATC will also fall because ATC = AFC + AVC
2. When AFC falls and AVC rises (a) ATC will fall where the drop in AFC is more than the rise in
AVC (b) ATC remains constant if the drop in AFC = the rise in AVC, and (c) ATC will rise where
the drop in AFC is less than the rise in AVC.
3. ATC will fall when MC is less than ATC and ATC will rise when MC is more than ATC. The
lowest ATC is equal to MC.
Cost output relationship in the long run
To study the cost-output relationship in the long run it is necessary to know the meaning of the
long run. As known in the long run the size of an industry can be expanded to meet the increased
demand for products as such in the long run all the factors of production can be varied according
to the need. Hence long-run costs are those which vary with output when all the input factors
including plant and equipment vary.

TR
As per the above figure suppose that at a given time the firms operate under plant SAC2 and
produce output OQ. If the firm decides to produce output OR and continues with the
current plant SAC2 its average cost will be R. But if the firm decides to increase the size of
the plant to plant SAC3 its average cost of producing OR output would then be TR. Since
the cost of TR is less than the cost on the old plant R, therefore new plant SAC3 is preferable
and should be adopted. Thus the long-run cost of producing OR output will be TR which
can be obtained by increasing the plant size.
Features of the LAC curve

To draw a long-run average cost curve(LAC) we start with several short run average cost(SAC)
curves, each such curve representing a particular size of plant including the optimum plant. One
can now draw a LAC curve which is tangential to all SAC curves. In this connection following
features are highlighted:
1. The LAC curve envelopes the SAC curves and is therefore called as envelope curve.
2. Each point of the LAC is a point of tangency with the corresponding SAC curve.
3. The points of tangency on the falling part of the SAC curve for points lying to the left of
the minimum point of LAC.
4. The points of tangency occur on the rising part of the SAC curves for the points lying to
the right of the minimum point of LAC.
5. The optimum scale of plant is a term applied to the most efficient of all scales of plants
available. This scale of plant is the one whose SAC curve forms the minimum point of the
LAC curve. It is SAC3 in our case which is tangent to the LAC curve at its minimum point
at R.
6. Both LAC and SAC curves are U-shaped but the difference between the two U shapes is
that the U shape of the LAC curve is flatter or less pronounced from the bottom. The
main reason for this is that in the long run, such economies are possible which cannot be
had in the short run, likewise, some of the diseconomies which are faced in the short run
may not be faced in the long run.