Page 197 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes short, each firm operates in the short-term production, but it is made for long-term production related
schemes. Therefore, a firm’s production plans related to knowledge is necessary to study the long-term
costs. Short and long-term cost of the depends on three things— (1) long-term total cost (LTC) (2) long-
term average cost (LAC) (3) long-term marginal cost (LMC).

9.13 Long Run Total Cost—LTC

In short, we can distinguish three types in the total cost, total fixed cost (TFC), total variable cost (TVC)
and short-term total cost (STC) of the same type but in the long run total cost (LTC). Long-term total
cost of the minimum cost at which each level can be produced.
According to Leibhafasky, “The long run total cost of production (LTC) is the least possible cost of
producing any given level of output when all inputs are variable.”
—Leibhafasky
A certain amount of objects in the long run a firm can produce at minimum cost. This is because the firm
has sufficient time in which it (i) can choose the ideal size plant (ii) Least Cost Factor Production.
It implies that short-term total cost will be less than or
equal to the total cost. But the long-term costs never Essential Overview
cost more than short-term. This fact can be explained Production costs for each level of a point on the curve
by the following formula– which reflects the short-term cost minimization.
LTC ≤ STC. Long-term cost curve point is the path of all such
points. Long-term cost curve is the envelope of the
It will read as—Long Term Total Cost (LTC) will short-term cost curve.
either be less than (<) or equal to (=) short term total
cost (STC).

Fig. 9.12

Y
STC 2
STC LTC
1
Total Cost (`)

O X
Q Q
1 2
Output

Long-term total cost curve at the minimum cost of production reflects various quantities. Therefore,
it is the curve at a point short of the total cost to the touch line. This can be explained by Fig. 9.12. In
Fig. 9.12 STC and STC in two different sizes of plants is a short-term total cost curve. Long-term total
1
2
cost (LTC) minimum points and the curve consisting of various short-term cost curve is earmarked.
Long-term cost is the minimum cost of production of a certain quantity of plants are all available to
choose from. The total cost of long-term total cost curve is tangent to the curve that is why, the curve
LTC, envelopes curve STC.

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