ECONOMIES OF SCALE
Economies of Scale
The condition that long-run average cost is greater than long-run marginal cost (LRAC > LRMC) means that a firm is operating to the left of the minimum point of its long-run average cost curve (the minimum efficient scale of production). This is the economies of scale range of production, characterized by a negatively-sloped long-run average cost curve. This condition means a firm has NOT constructed the most technically efficient factory. The firm is NOT producing output at the lowest possible long-run per unit cost. By increasing production, long-run average cost decreases.
LRAC > LRMC
When the long-run average cost exceeds long-run marginal cost, Manny's sandwich production is not at the minimum point on his long-run average cost curve. Manny can produce meals at a lower per unit cost in the long run by taking advantage of economies of scale, such as volume resource price discounts, input specialization, etc.
Long-run equilibrium for a monopolistically competitive industry achieves the condition (LRMC > LRAC), which means that firms are not producing output at the lowest possible per unit cost.
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