14.4 Long-Run Cost

MyEconLab Concept Video

In the long run, a firm can vary both the quantity of labor and the quantity of capital. A small firm, such as Sam’s Smoothies, can increase its plant size by moving into a larger building and installing more machines. A big firm such as General Motors can decrease its plant size by closing down some production lines.

We are now going to see how costs vary in the long run when a firm varies its plant—the quantity of capital it uses—along with the quantity of labor it uses.

The first thing that happens is that the distinction between fixed cost and variable cost disappears. All costs are variable in the long run.

Plant Size and Cost

When a firm changes its plant size, its cost of producing a given ...

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