7.4 Lower Costs in the Long Run

In its long-term planning, a firm selects a plant size and makes other investments to minimize its long-run cost based on how many units it produces. Once it chooses its plant size and equipment, these inputs are fixed in the short run. Thus, the firm’s long-run decisions determine its short-run cost. Because the firm cannot vary its capital in the short run but can in the long run, its short-run cost is at least as high as long-run cost and is higher if the “wrong” level of capital is used in the short run.

Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves

As a result, the long-run average cost is always equal to or less than the short-run average cost. Panel a of Figure 7.7 shows a firm ...

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