Production Choices and Costs: The Long Run

Read this section to learn about the behavior of the producer in the long run. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of the section before checking your answers.


  1. Apply the marginal decision rule to explain how a firm chooses its mix of factors of production in the long run.
  2. Define the long-run average cost curve and explain how it relates to economies and diseconomies or scale.

In a long-run planning perspective, a firm can consider changing the quantities of all its factors of production. That gives the firm opportunities it does not have in the short run. First, the firm can select the mix of factors it wishes to use. Should it choose a production process with lots of labor and not much capital, like the street sweepers in China? Or should it select a process that uses a great deal of capital and relatively little labor, like street sweepers in the United States? The second thing the firm can select is the scale (or overall size) of its operations. In the short run, a firm can increase output only by increasing its use of a variable factor. But in the long run, all factors are variable, so the firm can expand the use of all of its factors of production. The question facing the firm in the long run is: How much of an expansion or contraction in the scale of its operations should it undertake? Alternatively, it could choose to go out of business.

In its long-run planning, the firm not only regards all factors as variable, but it regards all costs as variable as well. There are no fixed costs in the long run. Because all costs are variable, the structure of costs in the long run differs somewhat from what we saw in the short run.

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