In the first part of this chapter we look at the long run, in which firms are
free to vary their use of all factors of production. Recall from the end of
the previous chapter that different amounts of the fixed factor lead to
different short-run cost curves. The choice faced by a firm in the long run
is to determine how much of the fixed factor to install—that is, to decide
which of the several short-run cost curves to use. Some firms use a great
deal of capital and only a small amount of labour. Others use less capital
and more labour. Here we examine the effects these choices have on
firms’ costs.
In the second part of the chapter, we examine the very long run, a period
over which technology changes. The discussion concerns the
improvements in technology and productivity that have dramatically
increased output and incomes in all industrial countries over centuries.
Firms are among the most important economic actors that cause
technological advances to take place. As in the short and long run, firms
respond to events, such as changes in factor prices. But in the very long
run, firms often respond by innovating—that is, by developing new
technologies.
Throughout this chapter, we should remember that the lengths of the
various “runs” under consideration are defined by the kinds of changes
that can take place, not by calendar time. Thus, we would expect actual
firms in any given time period to be on their short-run cost curves, as
described in Chapter 7 ; to choose among alternative short-run cost
curves in the long run, as described in the first part of this chapter; and to