3.1 Chapter 8 Producers in the Long Run (pg. 175)
There are no fixed factors in the long run. Profit maximizing firms choose from the available alternatives
the least-cost method of producing any specific output.
Profit-maximizing firms must minimize the cost of producing any given level of output. The condition for
cost minimization is
MP =Kp K
MP =Lp L
The principle of substitution states that, in response to changes in factor prices, profit-maximizing
firms will substitute toward the cheaper factors and substitute away from the more expensive factors.
A long-run cost curve represents the boundary between attainable and unattainable costs for the given
technology and given factor prices.
The shape of the LRAC curve depends on the relationship of inputs to outputs as the whole scale of a
firm’s operations changes. Increasing, constant, and decreasing returns lead, respectively, to decreasing,
constant, and increasing long-run average costs.
The LRAC and SRATC curves are related. Each SRATC curve represents a specific plant size and