Long run is period of production long enough so that all inputs are variable. This includes capital, plant, equipments, and etc. Let's assume that there are three plants with different sizes, small, medium and large. The average cost curves for the small is AC1, medium AC2 and large size AC3. Each of these firms will produce output at the lowest cost. Therefore, the long run average cost (LRAC) the lowest average cost for each output range.
Long run Average Cost Curve
| In the long-run, all costs of a firm are variable. The factors of production can be used in varying proportions to deal with an increased output. The firm having time-period long enough can build larger scale or type of plant to produce the expected output. The shape of the long run average cost curve is also U-shaped but is flatter than the short run curves and envelopes various short run average cost curves indicating different scale of plants. Firm in the long run operate the scale which most profitable where least average cost is obtained. |
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