Question

Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?

Short answer

Many enterprises will compete if the quantity demanded in the market far surpasses the quantity at the LRAC's minimum.

Only a few enterprises will compete if the amount demanded in the market is only slightly more than the quantity at the LRAC's minimum.

A single-producer monopoly is likely if the amount requested in the market is less than the quantity at the LRAC's minimum.

Step-by-step solution

Step 1. Introduction

Curve of long-run average costs:

The long run is defined as a time span during which all production parameters, referred to as inputs, are variable and businesses have enough leverage to enter and depart any market or industry.

The long run average cost curve of a firm illustrates the minimum average total cost at which a firm may achieve a certain amount of production in the long run when all inputs are variable.

Step 2. Explanation

The link between the quantity at the minimum of the long-run average cost curve and the quantity sought in the market at that price predicts how much competition will exist in the market.

Many enterprises will compete if the quantity demanded in the market far surpasses the quantity at the LRAC's minimum.

Only a few enterprises will compete if the amount demanded in the market is only slightly more than the quantity at the LRAC's minimum.

A single-producer monopoly is likely if the amount requested in the market is less than the quantity at the LRAC's minimum.

With the help of the diagram below, this is explained:

The sum of many short run average cost curves is the long run average cost curve.