ASOIU

Faculty: ITM
Specialty: Instrumentation Engineering
Group :612.19E
Department: Industrial Economic
Subject : Production economy and
management
Topic: Long Run production cost
Instructor : Akimova Samira
Student: Ahmadzada Elnur
Objectives:
 Define long run average cost.

 Understand how to construct the long run average cost curve.

 Define the concept of returns to scale, and understand how it affects the shape of the
long run average cost curve.

 Define minimum efficient scale.

Long run costs
Long-term costs accumulate when firms change production levels over time in response to
expected economic gains or losses. There are no stable (fixed) production factors in the long
run. Land, labor, capital goods, and entrepreneurship change to achieve the long-term value
of the production of goods or services.
What is Long Run ?
Long-term is a period in which all factors of production and costs are variable. In the long run,
firms can regulate all costs, and in the short term, firms can influence prices only by adjusting
production levels. In addition, while a firm may be a monopolist in the short term, it can
expect competition in the long run.
Long Run Average Cost Curve
In the short run, some inputs are fixed while the others are variable. On the other hand, in the
long run, the firm can vary all of its inputs. Long run cost is the minimal cost of producing any
given level of output when all individual factors are variable. The long run cost curve helps us
understand the functional relationship between out and the long run cost of production.

ATC or simply average cost (AC) is calculate by:

Total Cost ÷ Quantity long run average cost 

The Long-Run
Cost Curve

It (figure) consists of an unlimited

number of plant sizes, which might
be appropriate depending on the
firms desired level of output.
Short and Long Run
The short run The long run
• Fixed plant capacity • Variable plant capacity
• Variable intensity of • Firms enter and exit
plant use
• Variable output
Deriving a Long Run Average Cost Curve

These SACs are also called plant curves. In the short run, a firm
can operate on any SAC, given the size of the plant. For the sake
of our understanding, let’s assume that there are only three plants
that are technically possible. Therefore, the firm increases or
decreases its outputs by changing the amount of the variable
inputs.

However, in the long run, the firm examines each SAC to find the
curve that allows it to produce a given level of output at the
minimum cost. Hence, it chooses between SAC 1, SAC2, and
SAC3. 
Long-Run Average Cost Curves (LAC)

 Long-run- all factors are becoming variable.

 Long-run cost curve is a planning curve because it is a guide to the entrepreneur to plan his output.

 Long-run average cost is derived from short-run cost curves.

 LAC curve is the locus of denoting points the least cost of producing the corresponding output.

 It is a planning curve because on the basis of this curve the firm decides what plant to set up in order
to produce optimally.
 In the Long-Run, a firm can undergo any
adjustments to its resource inputs. Unlike the
Resource Short-Run, there are no fixed resources. It can
Adjustments alter its plant capacity, change industries, and
ultimately adapt to differing market conditions.
 Firm Size and Costs
Since we can change the size of our plant in
the Long-Run, we have options A, B, or C.
D is the Long-Run Average Total Cost
Curve. It is made up of a series of Short-
Run Curves.
Economies of Scale
Economies of Scale explain the down
sloping part of the Long-Run ATC Curve. As
the firm expands the size of its plants and its
total output in the long-run, it begins to
experience the economies of mass
production. You begin to use capital more
efficiently, specialize, share managerial
resources, etc.
Diseconomies of Scale
Increases in the ATC of producing a product as the firm expands in the long-run and becomes too
large. Main factor is difficulty controlling and coordinating a firm’s operations. Communication
problems, middle management, bureaucracy, apathetic employees, slow to change. Think of
problems you might see at a really large chain store.
Economies of Scale and Diseconomies of Scale
Law of Returns to Scale :
In the long run all factors of production are variable. No factor is fixed. Accordingly, the scale of production

can be changed by changing the quantity of all factors of production.

In the long run, output can be increased by increasing all factors in the same proportion. Generally, laws of

returns to scale refer to an increase in output due to increase in all factors in the same proportion. Such an

increase is called returns to scale.

Definition:

“The term returns to scale refers to the changes in output as all factors change by the same proportion.” Koutsoyiannis

“Returns to scale relates to the behaviour of total output as all inputs are varied and is a long run concept”. Leibhafsky
Returns to scale are of the following three types:

1. Increasing Returns to scale.

2. Constant Returns to Scale
3. Diminishing Returns to Scale
Increasing Returns to Scale:
Increasing returns to scale or diminishing cost
refers to a situation when all factors of
production are increased, output increases at a
higher rate. It means if all inputs are doubled,
output will also increase at the faster rate than
double. Hence, it is said to be increasing
returns to scale. 
Diminishing Returns to Scale:

Diminishing returns or increasing costs refer to that

production situation, where if all the factors of
production are increased in a given proportion, output
increases in a smaller proportion. It means, if inputs
are doubled, output will be less than doubled. If 20
percent increase in labour and capital is followed by 10
percent increase in output, then it is an instance of
diminishing returns to scale.
 Constant Returns to Scale:

 Constant returns to scale or constant cost refers to the production

situation in which output increases exactly in the same proportion in
which factors of production are increased. In simple terms, if factors
of production are doubled output will also be doubled.

In this case internal and external economies are exactly equal to

internal and external diseconomies. This situation arises when after
reaching a certain level of production, economies of scale are
balanced by diseconomies of scale. This is known as homogeneous
production function. 
Minimum
Efficient Scale

 The lowest level of output at which a

firm can minimize long-run average
costs. Capital intensive industries
realize minimum efficient scales at
very high levels of output. A Natural
Monopoly exists in an industry when
the economies of scale are so great that
one producer would be the most
efficient.