In the long run, all inputs (factors of production)
are variable and firms can enter or exit any industry or market. Consequently,
a firm's output and costs are unconstrained in the sense that the firm can
produce any output level it chooses by employing the needed quantities of
inputs (such as labor and capital) and incurring the total costs of producing
that output level.
TheLong Run Average Cost, LRAC,
curve of a firm shows the minimum or lowest average total cost at which
a firm can produce any given level of output in the long run (when all inputs
are variable).
In the long run, a firm will use the level
of capital (or other inputs that are fixed in the short run) that can produce
a given level of output at the lowest possible average cost. Consequently,
the LRAC curve is the envelope of the short run average total cost
(SR ATC) curves, where each SR ATC curve is defined by a specific quantity
of capital (or other fixed input).
