Long-Run Average Total Cost - LRATC

You make jalapeño-flavored candy. Your main costs are sugar and jalapeños. Prices for both move around a lot, based on what happens in commodities markets.

A long-run average total cost helps you get a meaningful estimate of expenses, even though there are lots of short-term fluctuations in prices. The figure allows you to make longer-term plans.

The LRATC provides the average cost per unit of output, as measured over a long period of time. It is especially helpful when costs for production are variable.

In January, you spent $10,000 on sugar. In February, $10,200. In March, $9,700. In April, $10,500. June saw a cost of $9,500, while July brought in a sugar bill of $10,600. The LRATC would just average these out, bringing you a figure of $10,083.33 per month.