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

The long-run average cost curve (LRAC) is a graphical representation of the average total cost of production for a firm, as output increases, over a long time period, in which all factors of production, including capital, labor, and technology, can change. The curve represents the lowest possible average cost per unit that can be achieved for any given level of output in the long-run. The long-run average cost curve generally has a U-shape, indicating that the average cost per unit decreases at first due to economies of scale, reaches a minimum (the bottom of the curve), and then increases due to diseconomies of scale.

Economies of scale occur when the cost per unit produced decreases as the production volume increases. This can happen for several reasons including: specialization and division of labor, bulk buying discounts in procurement, efficiency gains in the use of capital, and the decrease of per unit cost of research and development. Therefore, as firms increase their size and production scale, their cost per unit declines, allowing them to produce more efficiently.

Diseconomies of scale occur when the cost per unit increases with increasing production volumes. This can happen due to factors such as: increasing communication and coordination costs, bureaucratic inefficiencies, higher cost of transportation and distribution, misallocation of resources, and decreased managerial efficiency. Hence, as firms keep growing, at some point their cost per unit produced will start to rise.

Firms in most markets will be located at or close to the bottom of the long-run average cost curve for several reasons. First, competitive market forces will push firms to operate at the lowest cost possible, which is near the bottom of the LRAC. Second, at the lowest point of the LRAC, firms can take advantage of economies of scale without facing the negative effects of diseconomies of scale. Third, by being close to the bottom of LRAC, firms can achieve a competitive price, creating a larger market share and better profit margins. In conclusion, firms will be located at or close to the bottom of the long-run average cost curve because it allows them to take advantage of economies of scale, minimize the average cost of production, and be more competitive in the market.