Cambridge International as and a level Economics Ebook

Costs in the long run
In the long run, the fi rm can alter 
all
of its inputs, using 
greater quantities of any of the factors of production. It 
is now operating on a larger scale. So all of the factors of 
production are variable in the long run. In the very long 
run, technological change can alter the way the entire 
production process is organised, including the nature of the 
products themselves. In a society with rapid technological 
progress this will shrink the time period between the 
short run and the long run. In turn this will shift the fi rm’s 
product curves up and its cost curves down since fi rms are 
more effi
cient as a consequence of new technologies. Th
ere 
are now examples in consumer electronics where whole 
processes and products have become obsolete in a matter 
of months let alone years as a result of more powerful 
microchips increasing the volume and speed of the fl ow of 
information. One has only to see how mobile phones have 
changed and will continue to change in the future. Another 
example is in air transport where the new generation of 
supersized jets have greatly improved fuel effi
ciency and 
reduced average costs per passenger.
It is possible that a fi rm can fi nd a way of lowering its 
cost structure over time. One way might be by increasing 
the amount of capital used relative to labour in the 
production process, with a consequent increase in factor 
productivity. Car manufacturing and assembly plants are a 
very good example of this.
Th
e long-run average cost (
LRAC
) curve shows the least 
costly combination of producing any particular quantity. 
Moving from its short-run equilibrium shown in 
Figure 7.10a
, 
part b of this fi gure shows a fi rm experiencing falling 
LRAC
s 
over time. Th
is would enable it to lower the price without 
sacrifi cing profi t. Products such as laptops, digital cameras, 
iPhones and games players are examples where prices have 
fallen through competition and changing technology.
Th
e shape of the 
LRAC
is derived from a series of short-
run situations. As output increases so too does the scale 
of the fi rm’s operations. Th
e 
LRAC
curve is a curve that 
just touches or is tangential to each of these short-run cost 
curves. It is therefore the lowest possible average cost for 
each level of output where the factors of production are all 
variable. It should be pointed out, however, that the fi rm is 
not necessarily producing at the minimum point on each 
of its 
SRAC
curves.
Figure 7.11 
shows the 
LRAC
curve. Th
is represents the 
fi rm’s planning or envelope curve as it is sometimes known. 
It is a fl atter U-shape than the 
SRAC
curves and can be 
explained by