Cost Output Relationship in Long run
The long run is a period long enough to make all costs variable including such costs as are fixed in the short run. In the short run, variations in output are possible only within the range permitted by the existing fixed plant and equipment. But in the long run, the entrepreneur has before him a number of alternatives which includes the construction of various kinds and sizes of plants.
Thus, there are no fixed costs since the firm has sufficient time to fully adapt its plant. And all costs become variable. In view of this, the long-run costs will refer to the costs of producing different levels of output by changes in the size of plant or scale of production. The long-run cost-output relationship is shown graphically by the long- run cost curve—a curve showing how costs will change when the scale of production is changed.
The concept of long-run costs can be further explained with the help of an illustration. Suppose that at a particular time, a firm operates under average total cost curve U2 and produces OM. Now it is desired to produce ON. If the firm continues under the old scale, its average cost curve will be NT. If the scale of firm is altered, the new cost curve will be U3. The average cost of producing ON will then be NA.
NA is less than NT. So the new scale is preferable to the old one and should be adopted. In the long run, the average cost of producing ON output is NA. This may be called as the long-run cost of producing ON output. It may be noted here that we shall call NA as the long-run cost only so long as the U3 scale is in the planning stage and has not actually been adopted. The moment the scale is installed, the NA cost will be the short-run cost of producing ON output.
To draw a long-run cost curve, we have to start with a number of short-run average cost curves (SAC curves), each such curve representing a particular scale or size of the plant, including the optimum scale. One can now draw the long-run cost curve which tangential to the entire family of SAC curves, that is, it touches each SAC curve at one point.