Long Run Cost

In the long run, the firm can vary both the quantity of labor and the quantity of capital.
A. Plant Size and Cost
When a firm changes its plant size, the firm’s scale changes and its cost of producing a given output changes. When a firm changes the size of its plant, it might experience:
1. Economies of Scale
Economies of scale is a condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increases by a larger percentage and its average total cost decreases.
a. Economies of scale result from the specialization of labor and capital.
2. Diseconomies of Scale
Diseconomies of scale is a condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increases by a smaller percentage and its average total cost increases.
3. Constant Returns to Scale
Constant returns to scale is a condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increases by the same percentage and its average total cost remains constant.

B. The Long-Run Average Cost Curve
The long-run average cost curve (LRAC) is a curve that shows the lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed.
1. Economies and Diseconomies of Scale
The LRAC is divided into segments reflecting the three types of scale:
a. The downward-sloping portion of the LRAC reflects economies of scale.
b. The flat portion of the LRAC reflects constant returns to scale.
c. The upward-sloping portion of the LRAC reflects diseconomies of scale.