Long Run and Fixed Cost

Long run is a period of time during which all factors of production become variable. In other words, in the long run, all costs are variable. Therefore, fixed costs do not exist in the long run.

Explanation

Fixed costs are the costs that do not vary with the level of output. These costs are incurred even if the production is zero. Examples of fixed costs are rent, salaries of permanent employees, and insurance premiums. Fixed costs are associated with the short run, as they cannot be adjusted quickly.

On the other hand, in the long run, all costs are variable. In the long run, a firm can change the level of output by adjusting all factors of production, including labor, capital, and raw materials. Therefore, there are no fixed costs in the long run.

In the long run, a firm can adjust its production level, which means it can adjust the level of all its costs, including variable costs. The long-run average cost curve (LRAC) shows the minimum average cost at which a firm can produce any given level of output in the long run. The LRAC curve is U-shaped, which means that the average cost decreases initially as the firm expands its production. However, the average cost starts increasing beyond a certain level of output due to diseconomies of scale.

Conclusion

In conclusion, fixed costs do not exist in the long run as all costs are variable in the long run. The long-run average cost curve shows the minimum average cost at which a firm can produce any given level of output in the long run.