In the long run, all the factors of production used by an organization vary. The existing size of the plant or building can be increased in case of long run.
There are no fixed inputs or costs in the long run. Long run is a period in which all the costs change as all the factors of production are variable.
There is no distinction between the Long run Total Costs (LTC) and long run variable cost as there are no fixed costs. It should be noted that the ability of an organization of changing inputs enables it to produce at lower cost in the long run.
Long Run Total Cost
Long run Total Cost (LTC) refers to the minimum cost at which given level of output can be produced. According to Leibhafasky, “the long run total cost of production is the least possible cost of producing any given level of output when all inputs are variable.” LTC represents the least cost of different quantities of output. LTC is always less than or equal to short run total cost, but it is never more than short run cost. The LTC curve is made by joining the minimum points of short run total cost curves. Therefore, LTC envelopes the STC curves.
Long Run Average Cost
Long run Average Cost (LAC) is equal to long run total costs divided by the level of output. The derivation of long run average costs is done from the short run average cost curves. In the short run, plant is fixed and each short run curve corresponds to a particular plant. The long run average costs curve is also called planning curve or envelope curve as it helps in making organizational plans for expanding production and achieving minimum cost.
Thus, in the long run, an organization has a choice to use the plant incurring minimum costs at a given output. LAC depicts the lowest possible average cost for producing different levels of output. The LAC curve is derived from joining the lowest minimum costs of the short run average cost curves.
It first falls and then rises, thus it is U- shaped curve. The returns to scale also affect the LTC and LAC. Returns to scale implies a change in output of an organization with a change in inputs. In the long run, the output changes with respect to change in all inputs of production.
Long Run Marginal Cost
Long run Marginal Cost (LMC) is defined as added cost of producing an additional unit of a commodity when all inputs are variable. This cost is derived from short run marginal cost. On the graph, the LMC is derived from the points of tangency between LAC and SAC.
In case of increasing returns to scale (IRS), organizations can double the output by using less than twice of inputs. LTC increases less than the increase in the output, thus, LAC falls. In case of constant returns to scale (CRS), organizations can double the output by using inputs twice.
LTC increases proportionately to the output; therefore, LAC becomes constant. On the other hand, in case of decreasing returns to scale (DRS), organizations can double the output by using inputs more than twice. Thus, LTC increases more than the increase in output. As a result, LAC increases.
The firm’s minimum efficient scale is the level of output at which economies of scale end and constant returns to scale begin.