LONG-RUN TOTAL COST: The opportunity cost incurred by all of the factors of production used in the long run (when all inputs are variable) by a firm to produce a good or service, including wages paid to labor, rent paid for the land, interest paid to capital owners, and a normal profit earned by entrepreneurs. Unlike short-run total cost, long-run total cost cannot be separated into fixed cost and variable cost. In the long run, all inputs are variable, so all cost is variable.Long-run total cost is the total cost incurred by a firm in production when all inputs are variable. In particular, it is the per unit cost that results as a firm increases in the scale of operations by not only adding more workers to a given factory but also by building a larger factory. Not the Short RunIn the long run, when all inputs under the control of the firm are variable, there is no fixed cost. As such, there is no need to distinguish between total cost, fixed cost, and variable cost. In the long run, total cost is merely total cost.With no fixed inputs in the long run, increasing and decreasing marginal returns, and especially the law of diminishing marginal returns, are not relevant to long-run total cost. There are, however, two similar influences, economies of scale (or increasing returns to scale) and diseconomies of scale (or decreasing returns to scale).
Scale EconomiesLong-run total cost is guided by scale economies and returns to scale.
An S-shaped Curve
The flattening portion of this long-run total cost curve is attributable to economies of scale or increasing returns to scale. The steepening portion is then largely due to diseconomies of scale or decreasing returns to scale. No fixed inputs under the control of the firm are in operation. Two More CurvesLong-run cost is reflected by three curves. In addition to the long-run total cost curve, there is the long-run average cost curve and the long-run marginal cost curve. Each has a similar interpretation in the long run as the short run.
Check Out These Related Terms... | long-run average cost | long-run marginal cost | economies of scale | diseconomies of scale | minimum efficient scale | planning horizon | Or For A Little Background... | returns to scale | increasing returns to scale | decreasing returns to scale | long-run production analysis | long-run, microeconomics | total cost | opportunity cost | fixed input | variable input | marginal returns | marginal analysis | microeconomics | And For Further Study... | long-run average cost curve, derivation | long-run, macroeconomics | average total cost curve | law of diminishing marginal returns | short-run production analysis | total cost curves | opportunity cost, production possibilities | Recommended Citation: LONG-RUN TOTAL COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: September 20, 2024]. |