The Long-Run Average Cost Curve: Evidence from the Bottled Water Industry

Abstract

This paper examines the shape of the long-run average cost (LRAC) curve, a central concept in production economics and strategic management. While traditional neoclassical theory suggests a U-shaped curve, with costs declining and then rising due to diseconomies of scale, a significant body of empirical research points toward an L-shaped curve, where costs decline to the minimum efficient scale (MES) and then stabilise. Drawing on both theoretical and empirical perspectives, this paper applies a case study of a bottled water manufacturer in North Macedonia. Using production and cost data collected over a ten-year period, the study tests whether the LRAC follows the U-shaped or L-shaped pattern. The results show that after a phase of declining costs, the firm reached a zone of constant returns to scale, supporting the L-shaped hypothesis. The findings contribute to the debate on cost curve theory and provide managerial implications for capacity planning and efficiency.