| Abstract: | A number of influential authors have argued that the long-run average cost curve has only a limited role in the theory of the firm. This note examines this claim in more detail. It argues that the curve has an important role in determining long-run equilibrium as it provides an important ‘signal’ to agents in the capital and product market about the extent to which an industry is in disequilibrium. The effect of removing the certainty assumption is then examined and it is argued that the average cost curve is an important input in the assessment of operating risk. |
