economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, a cost function represents the minimum cost of producing a quantity of some good. The long-run cost curve is a cost function that models this minimum cost over time, meaning inputs are not fixed. Using the long-run cost curve, firms can scale their means of production to reduce the costs of producing the good.Fuss M.A. (1987) Production and Cost Functions. In: Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London
There are three principal cost functions (or 'curves') used in microeconomic analysis:
*
Long-run total cost In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints an ...
(LRTC) is the cost function that represents the total cost of production for all goods produced.
* Long-run average cost (LRAC) is the cost function that represents the average cost per unit of producing some good.
*
Long-run marginal cost
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible le ...
(LRMC) is the cost function that represents the cost of producing one more unit of some good.
The idealized "long run" for a firm refers to the absence of time-based restrictions on what inputs (such as
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relat ...
) a firm can employ in its
production technology
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stat ...
. For example, a firm cannot build an additional factory in the short run, but this restriction does not apply in the long run. Because forecasting introduces complexity, firms typically assume that the long-run costs are based on the technology,
information
Information is an abstract concept that refers to that which has the power to inform. At the most fundamental level information pertains to the interpretation of that which may be sensed. Any natural process that is not completely random ...
, and prices that the firm faces currently. The long-run cost curve does not try to anticipate changes in the firm, the technology, or the industry. It only reflects how costs would be different if there were no constraints on changing the inputs in the current period.
An ideal cost curve assumes technical efficiency because a firm always has an incentive to be as technically efficient as possible. Firms have a variety of methods of using various amounts of inputs, and they select the lowest total cost method for any given amount of output (quantity produced). For example, if a
micro-enterprise
A micro-enterprise (or microenterprise) is generally defined as a small business employing nine people or fewer, and having a balance sheet or turnover less than a certain amount (e.g. €2 million or PhP 3 million). The terms microenterprise and ...
wanted to make a few pins, the cheapest way to do so might be to hire a jack-of-all-trades, buy a little scrap metal, and have him work on it at home. However, if a firm wanted to produce thousands of pins, the lowest total cost might be achieved by renting a factory, buying specialized equipment, and hiring an assembly line of factory workers to perform specialized actions at each stage of producing the pins. In the short run, the firm might not have time to rent a factory, buy specialized tools, and hire factory workers. In that case, the firm would not be able to achieve short-run minimum costs, but the long-run costs would be much less. The increase in choices about how to produce in the long run means that long-run costs are equal to or less than short run costs,
ceteris paribus
' (also spelled '; () is a Latin phrase, meaning "other things equal"; some other English translations of the phrase are "all other things being equal", "other things held constant", "all else unchanged", and "all else being equal". A statement ...
.
The term
curves
A curve is a geometrical object in mathematics.
Curve(s) may also refer to:
Arts, entertainment, and media Music
* Curve (band), an English alternative rock music group
* ''Curve'' (album), a 2012 album by Our Lady Peace
* "Curve" (song), a 20 ...
does not necessarily mean the cost
function
Function or functionality may refer to:
Computing
* Function key, a type of key on computer keyboards
* Function model, a structured representation of processes in a system
* Function object or functor or functionoid, a concept of object-oriente ...
has any
curvature
In mathematics, curvature is any of several strongly related concepts in geometry. Intuitively, the curvature is the amount by which a curve deviates from being a straight line, or a surface deviates from being a plane.
For curves, the canonic ...
. However, many economic models assume that cost curves are
differentiable
In mathematics, a differentiable function of one real variable is a function whose derivative exists at each point in its domain. In other words, the graph of a differentiable function has a non-vertical tangent line at each interior point in its ...
so that the LRMC is well-defined. Traditionally, cost curves have quantity on the horizontal axis of the graph and cost on the vertical axis.
See also
*
Socially optimal firm size
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The socially optimal firm size is the size for a company in a given industry at a given time which results in the lowest production costs per unit of output.
Discussion
If only diseconomies of scale existed, ...