3.3 Long-Run Production Costs

In the long run a firm can change every input, including plant size, so it chooses the short-run cost structure that produces its target output most cheaply. The long-run average total cost curve is the 'envelope' of the lowest points available across all possible plant sizes.

As a firm scales up, LRATC typically falls first, economies of scale from specialization, bulk buying, and spreading design or setup costs over more units. Beyond some size, LRATC flattens (constant returns to scale) and eventually rises as coordination and management problems create diseconomies of scale.

Do not explain the long-run curve with diminishing marginal returns, that is a short-run concept that requires a fixed input. Economies and diseconomies of scale describe what happens when ALL inputs change together. The output where economies of scale run out (minimum efficient scale) helps explain how many firms an industry can support.