How does LAC curve’s U-shape depend upon returns to scale? Explain.

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LAC curve is a ‘U’ shape curve. This shape of LAC depends upon the returns to the scale. Returns to scale may be increasing, constant or decreasing. We can express it as follows:

Returns to Scale	LAC	Internal & External
Increasing returns to scale Constant returns to scale Decreasing returns to scale	LAC decreases LAC is minimum LAC increases	Economies rise here. Economies are set off by diseconomies. Diseconomies rise here.

The traditional shape of LAC is ‘U’ shaped but in modem technology, the LAC will be ‘L’ shaped because after getting economies of scale, a firm will always try to minimize the cost and in this way curve will be perfectly flat.

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How does LAC curve’s U-shape depend upon returns to scale? Explain.

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