2. Costs in the Long-Run

Just as some costs are fixed and others are variable so are the inputs, or resources, or, factors of production used by the firm and this has an impact on its short and long run operations. These time periods (the short and the long run) do not refer to specific, chronological time of hours, days, weeks, months or years. Rather they are periods of adjustments.

The Long-Run is that time period in which all factors of production are variable i.e. the firm can increase its productive capacity by changing the scale of its operation. For example, if a printing press can only deal with 1,000 sheets per minute then it does not matter whether you employ 1, 2 or 5 men to work with it, the most sheets you will print will be 1,000 per minute. But,by investing in a second machine their printing company could double its capacity to 2,000 sheets per minute. Once the planing decision (for the long run purposes) has been made to operate with two machines, the firm in practice then operates in a new short run situation with its capacity constrained to 2,000 sheets per minute whether it employs 5,6 or 10 men.


Decisions in the long-run are investment or planning decisions relating to the scale of production and decisions in the short run are to do with choosing an output level within the capacity constraint.

With this introduction to the firms costs and output decisions we can now apply them to see how firms decide on the output to produce in order to maximise profits, the combination of actors of production to employ and how output changes in response to employing more or a variable factor in combination with a fixed factor; (i.e. the law of diminishing returns) and the scale of operations to achieve optimum production. (i.e. the economies and dis-economies of scale)

Since there are no fixed factors in the long-run, there are no long-run fixed costs. All costs then, in the long-run are variable costs.



LRAC
Economies Diseconomies
of Scale Constant of Scale
Costs


Costs

0 Q1 Q2

Output (Q)


A typical long-run average cost curve