Each short-run average cost (SRAC) curve belongs to one level of fixed cost: SRAC₁ is a small factory, SRAC₂ a medium one, SRAC₃ large, SRAC₄ and SRAC₅ very large and ultra-large. Between the five drawn here lie infinitely many others. The long-run average cost (LRAC) curve is the lowest cost of producing each quantity when fixed costs can vary, so it is the bottom edge of the whole family. A firm planning to produce Q₃ should build the plant on SRAC₃; SRAC₂ or SRAC₄ would produce Q₃ at a higher cost.
Where LRAC slopes down, from Q₁ through Q₂ to Q₃, larger scale means lower average cost: economies of scale. Where it is flat, around Q₃ to Q₄, there are constant returns to scale. Where it rises, from Q₄ to Q₅, the firm has grown so large that it is hard to manage: diseconomies of scale. The slider changes how sharply each short-run curve bends.