LAC Curve and Economies of Scale

When the long-run average cost (LAC) curve falls as output expands, it indicates the presence of economies of scale. Economies of scale refer to the cost advantages that a firm can achieve as it increases its level of production. These cost advantages can arise from various factors, such as increased specialization, improved efficiency, and greater bargaining power.

Explanation:

Economies of scale occur when the average cost of production decreases as output increases. This means that as a firm expands its production, it can produce each unit at a lower cost. There are several reasons why this might happen:

1. Specialization: As a firm increases its production, it can take advantage of specialization by allocating tasks to workers who are better suited for specific tasks. This leads to increased efficiency and lower costs.

2. Technological Advancements: As a firm grows, it can invest in new technologies and equipment that can improve productivity and reduce costs. For example, a larger firm may be able to afford more advanced machinery that can produce goods at a faster rate and with less waste.

3. Purchasing Power: Larger firms often have greater bargaining power with suppliers, allowing them to negotiate better prices for raw materials or other inputs. This can result in cost savings that smaller firms cannot achieve.

4. Spread of Fixed Costs: Some costs, such as rent for a production facility or the salary of top management, are considered fixed costs because they do not change with the level of production. As a firm expands its output, these fixed costs can be spread over a larger number of units, leading to lower average costs.

Conclusion:

In summary, when the LAC curve falls as output expands, it indicates that the firm is experiencing economies of scale. These economies of scale can result from various factors, such as increased specialization, technological advancements, purchasing power, and the spread of fixed costs. Achieving economies of scale can provide a competitive advantage to firms by allowing them to produce goods at a lower cost and potentially offer lower prices to consumers.

ANSWER IS ' D '.