Microeconomics,, 16th Canadian Edition

8.1 The Long Run: No Fixed Factors LO

1, 2, 3

There are no fixed factors in the long run. Profit-maximizing firms

choose from the available alternatives the least-cost method of

producing any specific output.

Profit-maximizing firms must minimize the cost of producing any

given level of output. The condition for cost minimization is

The principle of substitution states that, in response to changes in

factor prices, profit-maximizing firms will substitute toward the

cheaper factors and substitute away from the more expensive factors.

A long-run average cost curve represents the boundary between

attainable and unattainable costs for the given technology and given

factor prices.

The shape of the LRAC curve depends on the relationship of inputs to

outputs as the whole scale of a firm’s operations changes. Increasing,

constant, and decreasing returns lead, respectively, to decreasing,

constant, and increasing long-run average costs.

The LRAC and SRATC curves are related. Each SRATC curve

represents a specific plant size and is tangent to the LRAC curve at the

level of output for which that plant size is optimal.

MMPPK =

L

pK

pL