IB Economics | Envelope Curve

In this video I explain how average cost of production changes over the long run. I show how the Long Run Average Cost Curve (Envelope Curve) contains multiple short run average cost curves.
The reason the average cost falls over a larger range of production is because the firm is employing more fixed factors of production. This leads to the variable factors of production to be more efficient and hence achieve a lower average cost per unit.
The lowest average cost of production will be achieved at the lowest point of a SRAC that is tangent to the LRAC.

[@yashkhaitan6608]

Thank you sooo much
i was trying to understand this from one year and I had almost given up on this diagram

[@isabella7131]

THANK YOUUU!! I spent ages trying to find a video that explained it like you did and I finally understand it 😁

[@dylanparker130]

This was so helpful - thank you so much!

[@pwong4507]

Very helpful! Why is the average cost curve not made up of the minimum of the short-run average cost curves? Isn't the minimum of a short-run average cost curve the lowest average price?

[@andreigalanchuk]

The long run average cost also happens to be at the minimum of the short run average cost SRAC3. So what you are saying is correct. Does this answer your question?

[@pwong4507]

@@andreigalanchuk But if you take SRAC1 for example, the minimum point of SRAC1 is not a point on the long-run average cost curve. I thought that the long-run average cost curve is made up of the minimum of short-run average cost curves, or is that incorrect. Thanks!

[@isabella7131]

@@pwong4507 it's because in the long run you can achieve even lower than the lowest point on the SRAC curve through changing factors of production. So it isn't part of the LRAC curve. I think anyway

[@pablotorres7364]

I understand it as: how would be Q1 as cheap in the SRAC as in the LRAC (where factors can be eventually optimized)? Therefore we need to leave some room for improvement from SR to LR