Long-run Cost

Definition: The Long-run Cost is the cost having the long-term implications in the production process, i.e. these are spread over the long range of output. These costs are incurred on the fixed factors, Viz. Plant, building, machinery, etc. but however, the running cost and the depreciation on plant and machinery is a variable cost and hence is included in the short-run costs.

The long-run cost is incurred when the firm decides to change its production capacity over time in order to respond to the anticipated economic profits and losses. In short-run, all the factors of production and costs are variable and hence the level of output can be changed by varying all the factors, the even capital.

In the long run, even the fixed cost becomes the variable cost as the size of the firm or scale of production increases. The entrepreneurship, land, labor, capital goods, etc. all vary to attain the desired level of profits in the long run, and the cost of each factor adds to the long-run costs.

The long-run stage is characterized by planning and implementation wherein the producer decides on the level of production and take long-run decisions that affect the overall cost of the firm. The long-run decisions include leaving or entering the market, expanding or contracting the company’s operations, changing the quantity of production, etc.