What is the 'Long-Run Average Total Cost - LRATC'
The long-run average total cost (LRATC) is a business metric that represents the average cost per unit of output over the long run, where all inputs are considered to be variable.
Long-term unit costs are almost always less than short-term unit costs because in a long-term time frame, companies have the flexibility to change big components of their operations, such as factories, to achieve optimal efficiency. A goal of both company management and investors is to determine the lower bounds of LRATC.
BREAKING DOWN 'Long-Run Average Total Cost - LRATC'
For instance, if a manufacturing company builds a new, larger plant for production, it is assumed that the LRATC per unit would eventually become lower than at the old plant as the company takes advantage of certain economies of scale.