In the long run, all inputs are variable. Fixed factors have relevance only in the short-run. If the horizon enough. the producer can change all fixed factors to variable factors. In the long run are no TFC or AFC curves
Similarly there is no distinction total costs and total variable costs. We need just refer to total costs. It is also to be borne in mind that there is no distinction between average total costs and average variable costs. Instead we can use the term "Long Run Average Cost" or LAC. Marginal cost in the long run may be termed as LMC.
Let us see what are the shapes of LAC and LMC. Why do they assume such shapes? What are the relationships between them? All these are relevant questions which have to be answered.
We have seen that the marginal cost curve and average cost curve are 'U' shapes in the short-run. In the long run also LAC and LMC are 'U' shaped. The LMC curve cuts the LAC curve its minimum point. But the reason behind the 'U' shape is not the law of diminishing returns. In the long run all inputs are 'U' shape is not the law of diminishing returns. In the long run all inputs are variable. The 'U' shape of these of the curves id determined by the pattern of 'Returns to scale'.
When inputs are increased by 10% and output increases by 15% (more than proportionately) the increasing returns to scale in operation. In this case the average cost curve fails as output expands. When output expands, and average cost rises, decreasing returns to scale operates. If average cost remains constant even if output expands, returns to scale are constant.
When increasing returns to scale operate LAC decreases with expansion in output.
When decreasing returns to scale operation, LAC increase with output.
When constant returns to scale in operation. LAC remains constant with output.
Similarly there is no distinction total costs and total variable costs. We need just refer to total costs. It is also to be borne in mind that there is no distinction between average total costs and average variable costs. Instead we can use the term "Long Run Average Cost" or LAC. Marginal cost in the long run may be termed as LMC.
Let us see what are the shapes of LAC and LMC. Why do they assume such shapes? What are the relationships between them? All these are relevant questions which have to be answered.
We have seen that the marginal cost curve and average cost curve are 'U' shapes in the short-run. In the long run also LAC and LMC are 'U' shaped. The LMC curve cuts the LAC curve its minimum point. But the reason behind the 'U' shape is not the law of diminishing returns. In the long run all inputs are 'U' shape is not the law of diminishing returns. In the long run all inputs are variable. The 'U' shape of these of the curves id determined by the pattern of 'Returns to scale'.
When inputs are increased by 10% and output increases by 15% (more than proportionately) the increasing returns to scale in operation. In this case the average cost curve fails as output expands. When output expands, and average cost rises, decreasing returns to scale operates. If average cost remains constant even if output expands, returns to scale are constant.
When increasing returns to scale operate LAC decreases with expansion in output.
When decreasing returns to scale operation, LAC increase with output.
When constant returns to scale in operation. LAC remains constant with output.
