Long Run Cost Curves

Bookmark added to your notes.
View Notes

The long-run cost curve is a part of macroeconomics which deals with the production and size of a plant in an organisation. This section speaks of the variables and factors which affect the curve of the production and cost in the long run. It is important to note that there is no difference between the Long-run total costs, and the long-run cost is variable. It depends on the ability of a firm and its changing inputs at a lower price.

Apart from understanding the terms, a student needs to gain knowledge about short-run and long-run cost. A long-run is different from short-run in various factors and inputs. Ideally, a long-run cost curve and short-run curve are distinguished with Long-run Marginal, Total and Average costs.

The Factors Needed to Determine Short Run and Long-Run Cost Curves

To determine the long-run total cost curve, an individual must know factors that affect changes in production. 

Mentioned below are some factors of the long-run cost curve for drawing its graph.

1. Long-run Total Cost

[Image will be Uploaded Soon]

The Long-run Total Cost (LTC) is the minimum cost by which a given level of output can be determined. This long-run total cost, according to Leibhafasky, is the least cost possible in producing various output with variable inputs. It represents the smallest amount of multiple measures of production. It is seen that LTC is either less or similar to short-run total cost but can never be more than it.

2. Long-run Average Cost

[Image will be Uploaded Soon]

Long-run Average Cost (LAC) is the total cost divided by any level of output. It is ideally derived by long-run average price from short-run average cost curve. In the short-run turn, a firm or plant remains fixed, and the curve corresponds to a respective plant. Here the long average cost curve is termed as planning or envelope curve due to its function in preparing plans for enlarging production at a minimum cost.

A good example will be taking three sizes of plants where nothing else can be built. In the short-run curve, this plant size remains fixed, which can increase or decrease the variables. However, in the long term, a firm has the flexibility to choose the options of plants which can aid in the highest output at minimum cost.

3. Long-run Marginal Cost Curve

[Image will be Uploaded Soon]

In Long run Marginal Cost (LMC), the added cost of production and the unit of a product becomes a variable. This cost can be derived from short-run marginal cost.

The long-run cost curve is a vast chapter with diagrams and explanation on determining variables. These graphs and curves make a significant part of a firm's production and sale. 

A student needs to understand these theories and concepts better to secure a good ranking in exams. Vedantu is one such educational site that offers an in-depth explanation of the short-run cost and long-run cost and its function.

They also offer pocket-friendly study material and solutions on a long-run cost function with exercises. To enjoy these features, download the app or log in to the website now.

FAQ (Frequently Asked Questions)

1. Why is the Long-run Cost Curve in U Shape?

Ans. The long-run curve is usually U in shape due to various reasons. The economies and diseconomies of a scale cause the angle to change. If a company has high fixed costs, then the increasing output leads to a lower average price. They can also experience diseconomies in a specific production if variable changes. The variable like increased output which leads to a higher average cost in an economy. 

A good example will be a big firm where communication and coordination between co-workers are difficult. It is essential to know that not all firms will experience this diseconomy of scale. There are chances that LARC could be sloping downwards.

2. What is LRAC in Production and Cost Run?

Ans. The long-run average cost (LRAC) curve shows all possible output levels against an average cost In a U-shaped curve. It is made of ATC curve tangency points that are short-run curves in nature. Here the point of the efficient scale is the LRAC curve with a minimum average cost for a firm. 

Moreover, each output point on the LARC curve shows a particular combination of labour and capital. It is essential to know that a firm can change both capital and labour that is possible in the long run. In the short run, money can get frozen. 

3. What is a LAC Curve?

Ans. LAC or the long-run cost curve shows the relation between average total cost and output at a fixed price to minimise average total cost. There are ideally no fixed inputs in the long run as all the inputs are variable. In the long term, a firm can easily change all its inputs. There are Scale returns to a decreasing point when a long-run average total cost increases with an increase in output.

In the short run, the size of a scale or plant remains fixed whereas in long-run changes can be made accordingly. Moreover, in the long run, a firm can give rise to various cost relationships as it can move from one plant to another. It can also build a large plant or smaller one depending on the need.