Long-Run Average Total Cost - LRATC

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Economics

    A social science that studies how individuals, governments, firms ...
  3. Long Run

    A period of time in which all factors of production and costs ...
  4. Long Run Incremental Cost - LRIC

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

    In economics, it is the concept that within a certain period ...
  6. Marginal Cost Of Production

    The change in total cost that comes from making or producing ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

  3. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

  4. How Fannie Mae And Freddie Mac Were ...
    Economics

    How Fannie Mae And Freddie Mac Were ...

comments powered by Disqus
Hot Definitions
  1. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  2. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  3. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  4. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  5. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  6. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
Trading Center