Long-Run Average Total Cost

Definition

The long-run average total cost refers to the average cost per unit of output when all inputs can be varied. It takes into account both fixed and variable costs.

Analogy

Imagine you are running a lemonade stand. In the short run, you have to pay a fixed cost for things like the stand and equipment. But in the long run, you have more flexibility to adjust your costs by changing things like the size of your stand or the number of employees you hire.

Related terms

Short-Run Average Total Cost: This term refers to the average cost per unit of output when at least one input is fixed.

Marginal Cost: Marginal cost is the additional cost incurred from producing one more unit of output.

Economies of Scale: Economies of scale occur when increasing production leads to lower average costs per unit.