Here are the average cost curves for the small (AC1), medium (AC2) and large(AC3) plant sizes:
If you produce 1000 units, the small plant size gives the lowest cost.
If you produce 3000 units, the medium plant size gives the lowest cost.
If you produce 4000 units, the large plant size gives you the lowest cost.
Therefore, the long run average cost (LRAC) -- the lowest average cost for each output range -- is described by the "lower envelope curve," shown by the thick, shaded curve that follows the lowest of the three short run curves in each range.
