2. Long Run Total Costs (LTC)
In the long period, all the factors of
production become variable. A firm can
change its size and scale of plant to meet
the changed demand conditions.
As no factor of production is fixed in the long
run, the firm has no fixed costs that is all
costs are variable in the long run.
Shape of LTC Curve
Like TVC curve in the short run, LTC curve
always starts from the point of origin as it is
zero at zero level of output. LTC increases
at a diminishing rate in the beginning, then it
tends to increase at a const rate and
ultimately it increases at an increasing rate.
3. Long-run Average Cost (LAC)
Long run Average Cost (LAC) is obtained by dividing
the long-run total cost (LTC) by the quantity of output
(Q). It is also known as per unit cost of production.
LAC = LTC/Q
Long run Marginal Cost (LMC)
Long-run marginal cost refers to the addition to long-
run total cost, when one more unit of commodity is
produced.
LMCn = LTCn - LTC (n-1)
4. Relation between LAC and LMC
The relationship between LAC and LMC in the long
run is same as the one between AC and MC in the
short run. When LAC falls, LMC <LAC; when LAC is
minimum, LMC=LAC and when LAC rises, LMC >
LAC.
Shape of LAC and LMC :- LAC and LMC curves are
U-shaped not because of the Law of variable
proportions, but because of the Law of Returns to
scale. Both LAC and LMC initially fall due to
economies of scale, but later rises due to
diseconomies of scale. In between, they are
constant when economies of scale are counter
balanced by the diseconomies of scale.
