Long-Run Average Total Cost - LRATC


DEFINITION of 'Long-Run Average Total Cost - LRATC'

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.

  1. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased ...
  2. Long Run

    A period of time in which all factors of production and costs ...
  3. Marginal Cost Of Production

    The change in total cost that comes from making or producing ...
  4. Long Run Incremental Cost - LRIC

    Forward-looking incremental costs that can be accounted for by ...
  5. Economics

    A social science that studies how individuals, governments, firms ...
  6. Short Run

    In economics, it is the concept that within a certain period ...
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