jod is long enough to enable a firm to vary all its factor inputs. In the = pears ‘2 particular plant capacity. It can move from one plant capacity to it is obliged to do so in the light of changes in demand for its products. ‘The firm can expand its plant in order to meet the long-term increase in demand or r. plant capacity if there is a drop in demand. in: Jn the long-run, thus, there are only the variable costs or direct costs as total cost. There is. ao dichotomy of total cost into fixed and variable costs as we see in the short-run analysis, Tn the long-run, when we examine the unit cost of a firm, we come across only the average U ‘marginal costs. Hence, we have only to study the shape and relationships of the long-run average b cost curve and the long-run marginal cost curve. ° ‘Asa mater of ict, the long-run is a “planning horizon.” All economic activity actually in the shor-rn, the long-run is only a perspective view for the future course of action, economic entity — entrepreneur or consumer — can plan his course of action in the long-fun, but in the real course of operation chooses actually numerous aspects of the short-run. This means, the long-run comprises all possible short-run situations from which a choice is made for the actual course of operation. In reality, thus, the long-run consists of perspective planning for the expansion of the firm; hhence, it involves various short-run adjustments visualised over a period of time: : 10.17.1 Derivation of the LAC Curve —_ Methodologically, the long-run average cost curve (LAC) is the envelope of the various short- yun average cost curves: It is drawn as tangent to the SACs as depicted in Figure 10.7. = In Figure 10.7, the LAC is derived as tan; ‘The MC is fanes Usp st AC is derived as tangent to SAC, SAC, ad SAC MC is,‘e Tangent Curve, By joining the loci of various plant ‘hore phases, the LAC curve is drawn asa tangent curve. ‘The LAC approximates «soc curve ifthe plant sizes can be varied by ‘capacities and there are numerous short-run average cost curves to each of [MCs a tangent, In ober words, the Tong-run average cost curve is the locus of points of gene (See Fig. 10.7 an 103), ir + Envelope Curve. The curve is also referred t0 a5 “envelope curve’, because cavelope of a group of average cost curves different levels of output In Figure 10.7, the LAC is enveloping or tangential to number of plant sizes and related SACs. In Figure 10.7 the LAC 's drawn on the basis of possible plant sizes. This i a much simplified assumption, NeTc curve, A rational entrepreneur to ale the optima scale of pant The Seale of plant is that plan size at ra SAC is tangent tothe LAC, such hat Te te curves ave the minimum point of pens In Fig. 10, at 00, level of ouput, Seis tangent to LAC at both the minimum prints ‘Tas, 00; is regarded asthe optimum scale of tp at has the minimum per unit cost It should arated that there willbe only one such point on the TAC curve to which a SAC curve is tangent as well as ‘The LMC and the LAC ¢ sa oa tos manimum pots atthe point of tngency. And as sch, this parieaar SAG pte ee pated a he most efficient one. All ther SAC curves are tangent to the LAC bt at the pl si eee miter LAC nor SAC curve has the minimum point. 1n facta all these pins SAC curves are either rising or falling, showing a higher cost “Anyway, te optimum scale of plant will inevitably be adopted in the Tongan by the fm under prfet competition. But the firms under monopoly and monopolistic competition are Is ily to select the optimum plant size Minimum cost combinations. Since LAC is derived asthe tangent to various SAC se A Under consideration, the cost levels presented by the LAC curve for diferent evel of tpt sees minuny cost combingtons of resource inpts to be adopted by te Sem 4 at each long-run level of output. ‘ Flater U-shaped. The LAC curve is less U-shaped or rather dish-shaped ‘This means that inthe bepiming ft gradually slopes downwards and then, afer racing 8 Ss Point, it gradually begins to slope upwards. This implies that in the longs ct Fim ado anger leo spat long-run average cont he been decrease: Ata certain oi, it remains constant andthe rises. Tis BEDRIM Lenape run average costs is attributed to the operation of laws of retums 1 scale. beset ‘Teturns in the beginning cause decreasing costs, constant returns, constant c0sts decreasing returns, increasing costs. Fe Scanned with CamSce