3.5 Long-run Production Costs

Long-run: all inputs are variable

In the long run, firms can adjust all inputs, including plant size — there are no fixed costs. Firms choose the optimal combination of inputs to minimize cost for any output level, generating the long-run average total cost (LRATC) curve, which is envelope-shaped, tracing the minimum ATC from many possible short-run curves.

Economies and diseconomies of scale

As output rises, economies of scale cause LRATC to fall (specialization, bulk buying). At the minimum efficient scale, LRATC bottoms out. Beyond that, diseconomies of scale (coordination problems) cause LRATC to rise. Constant returns to scale occur when LRATC is flat over a range of output.

Shape of the LRATC curve

The LRATC curve is typically U-shaped, formed by the lower envelope of many short-run ATC (SRATC) curves, each representing a different plant size. Each SRATC touches LRATC at only one output level (except at the minimum point, where SRATC minimum equals LRATC minimum).

Key terms

Long run (production)

The time period in which all inputs, including capital and plant size, are variable — there are no fixed costs.

LRATC curve

Long-run average total cost curve; the envelope of minimum SRATC points across all possible plant sizes.

Economies of scale

Occurs when LRATC falls as output increases, due to specialization, efficiency, and bulk purchasing.

Diseconomies of scale

Occurs when LRATC rises as output increases, often due to management/coordination problems in large firms.

Minimum efficient scale

The output level at which LRATC reaches its lowest point, right before diseconomies of scale begin.

Try an AP-style question

Economies of scale occur when…

1. long-run ATC falls as output rises
2. costs stay the same at all outputs
3. marginal cost falls to exactly zero
4. long-run ATC rises as output rises