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CISCEISC (Arts) Class 12
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Syllabus

Long-Run Cost Curves

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Estimated time: 18 minutes
CISCE: Class 12

Short run vs long run

  • Short run: At least one factor (like plant size, machinery) is fixed; the firm can change only variable factors like labour and raw materials.
  • Long run: All factors are variable; the firm can also change plant size or build a new plant.
  • In the long run, the firm has enough time to choose the best (optimum) plant size for each level of output and produce at the lowest possible cost.
CISCE: Class 12

Long-run total cost (LTC) curve

Definition:

  • Long-run total cost (LTC) is the minimum total cost of producing different levels of output when all factors of production (including plant size) are variable.

Shape and features:

(i) LTC starts from the origin (0,0):

  • If output is zero, the firm can avoid all cost in the long run (no fixed cost).

(ii) It slopes upwards:

  • As output increases, LTC also increases.

(iii) Inverse S-shape:

  • At first, LTC increases at a decreasing rate (curve is concave downward).
  • After a certain output (say OQ), LTC increases at an increasing rate (curve is concave upward).

Reason:

  • Initially, the firm enjoys economies of scale → cost rises slowly.
  • Later, the firm faces diseconomies of scale → cost rises faster.

Link with short run:

  • LTC is the envelope of many short-run total cost (STC) curves.
  • For each output level, the firm chooses the plant (STC) that gives the least cost; joining these least-cost points gives the LTC curve.
CISCE: Class 12

Long-run average cost (LAC) curve

Definition:

  • Long-run average cost (LAC) = Long-run total cost (LTC) ÷ output (Q).
  • It shows the minimum per unit cost of producing each level of output when all inputs, including plant size, are variable.

LAC and plant size:

  • Each short-run average cost (SAC) curve corresponds to one plant size.
  • In the short run, the firm is “stuck” with one SAC (one plant).
  • In the long run, the firm can choose the best SAC (best plant) for each output.
  • LAC is a smooth curve that is tangent to many SAC curves → it is called an “envelope curve” or “planning curve”.

Shape:

  • LAC is generally U-shaped and flatter than individual SAC curves.
  • As output increases:
    1. LAC falls at first.
    2. Reaches a minimum at some output (say OQ).
    3. Rises after that.

Reason for U-shape:

  • Falling part: economies of scale (average cost falls as scale of production increases).
  • Rising part: diseconomies of scale (average cost rises when the scale is too large).
CISCE: Class 12

Long-run marginal cost (LMC) curve

Definition:

  • Long-run marginal cost (LMC) is the addition to long-run total cost when the firm produces one extra unit of output in the long run (after optimally adjusting all inputs).

Shape and relation with LAC:

  • When LAC is U-shaped, LMC is also U-shaped.
  • The relation between LAC and LMC is the same as between SAC and SMC:
    1. When LMC < LAC → LAC is falling.
    2. When LMC = LAC → LAC is minimum and constant at that point.
    3. When LMC > LAC → LAC is rising.
  • LMC cuts LAC at the minimum point of LAC and from below.
CISCE: Class 12

LAC's U-Shape Explained: Economies of Scale vs Diseconomies

Meaning:

  • Economies of scale: Advantages of large-scale production that reduce average cost when output increases.
  • Diseconomies of scale: Disadvantages of too large a scale that increase average cost when output increases.

Economies of scale (reasons for falling LAC):

  • Technical economies: better, more efficient machines.
  • Managerial economies: specialised managers and better supervision.
  • Purchasing economies: buying raw materials in bulk at lower prices.
  • Marketing and financial economies: lower cost of advertising, easier and cheaper finance.

Diseconomies of scale (reasons for rising LAC):

  • Management becomes difficult; communication delays.
  • Control and supervision problems.
  • Coordination problems when the firm becomes too large.

Effect on LAC:

  • At low and medium output: economies of scale dominate → LAC falls.
  • At optimum output, economies are fully used; LAC is minimum.
  • Beyond optimum output: diseconomies dominate → LAC rises.
CISCE: Class 12

Key Points: Long-Run Cost Curves

  • Long run = all inputs variable, no fixed cost, firm can change plant size and method of production.
  • LTC shows minimum total cost for each output in the long run.
  • It starts from origin, slopes upwards, and is inverse S-shaped.
  • It is formed as the envelope of STC curves.
  • LAC gives the lowest possible average cost for each output in the long run.
  • It is U-shaped and flatter than SAC.
  • It is the envelope curve of SACs and is used for long-run planning.
  • LMC measures the change in long-run total cost for one more unit.
  • Both LAC and LMC are U-shaped.
  • LMC cuts LAC at LAC’s minimum point.
  • U-shape of LAC is explained by economies (left side) and diseconomies (right side) of scale.
  • The minimum point of LAC is called the optimum point or optimum scale of production.

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