Q.Distinguish between short-run cost and long-run cost. What is meant by the Long-Run Average Cost (LAC) curve being an 'envelope curve'?

The short run and long run differ in whether any factor of production is fixed, and this single difference drives everything else about how their cost curves are built.

Short-run cost is analysed on the assumption that at least one factor of production — typically plant size or major machinery — is fixed and cannot be changed however output is adjusted. This is exactly why short-run cost splits into Total Fixed Cost and Total Variable Cost, and why AFC exists as a separate, always-falling curve.

Long-run cost is analysed on the assumption that every factor of production, including plant size itself, can be varied — there is enough time for the firm to build a new factory, install different machinery, or scale down entirely. Since nothing is fixed in this time frame, there is no TFC and no AFC in the long run; every cost is, in the long-run sense, variable. …

A common error is thinking LAC is simply one of the SAC curves, or an average of all the SAC curves — LAC is neither; it is built by selecting the lowest point availabl …