Long run costs

In the long run, all inputs are variable, so there are no fixed costs: TC = TVC.

• Long-run average cost: LRAC = TC ÷ q.
• Long-run marginal cost: LRMC = TC at q − TC at (q − 1). The sum of the LRMCs gives TC.

The shape of the LRAC curve comes from returns to scale (not from the law of variable proportions):

• With increasing returns to scale, output rises faster than inputs, so cost rises by less than output, and LRAC falls. A firm that doubles its output while its costs rise by only 70% is in this stage.
• With constant returns, LRAC is constant: this is its minimum.
• With decreasing returns, cost rises faster than output, and LRAC rises.

So the LRAC curve is also U-shaped: economies of scale first, then diseconomies.

LRMC cuts LRAC from below at LRAC's minimum point.