Long-Run Cost

In the long run, a firm faces no fixed factor at all — plant size, machinery, and every other resource can be varied. This has two direct consequences for cost analysis.

First, since nothing is fixed, there is no TFC and no AFC in the long run — every cost is, in the long-run sense, a variable cost. The relevant curves are the Long-Run Average Cost (LAC) and Long-Run Marginal Cost (LMC).

Second, the firm can now choose its plant size to suit the output it wants to produce. For each possible plant size there is a short-run average cost (SAC) curve; the LAC curve is built by selecting, at every level of output, the lowest SAC available from any of the possible plant sizes. Because of this, LAC is often called the 'envelope curve' or 'planning curve' — it envelopes (just touches) every SAC curve from below, tracing out the least-cost way to produce each output when plant size itself can be chosen. …