Loading the player...

What is the 'Long Run'

The long run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. Additionally, while a firm may be a monopoly in the short term, they may expect competition in the long run.

In economics, long-run models may shift away from short-run equilibrium, in which supply and demand react to price levels with more flexibility.


The long run is a time period during which a manufacturer or producer is flexible in its production decisions. For example, a business with a one-year lease will have its long run defined as any period longer than a year since it’s not bound by the lease agreement after that year. In the long run, the amount of labor, size of the factory, and production processes can be altered if need be. Businesses can either expand or reduce production capacity or enter or exit an industry based on expected profits. Firms examining the long run understand that they cannot alter levels of production in order to reach an equilibrium between supply and demand.

In response to expected economic profits, firms can change production levels. For example, a firm may implement change by increasing (or decreasing) the scale of production in response to profits (or losses), which may entail building a new plant or adding a production line.

The short run, on the other hand, is the time horizon over which factors of production are fixed, except for labor, which remains variable.

In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust.

Long Run Costs

As explained above, the scale of production can change in the long run, which means that all costs are variable in the long run. In the long run, a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost. If a company is not producing at its lowest cost possible, it may lose market share to competitors that are able to produce and sell at minimum cost.

Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. In effect, economies of scale are the cost advantages that are achieved when there is an expansion of the size of production. The cost advantages translate to improved efficiency in production, which can give a business a competitive advantage in its industry of operations, which, in turn, could translate to lower costs and higher profits for the business.

The long run is associated with the long-run average (total) cost (LRAC or LRATC), the average cost of output feasible when all factors of production are variable. The LRAC curve is the curve along which a firm would minimize its cost per unit for each respective long-run quantity of output. As long as the LRAC curve is declining, then internal economies of scale are being exploited. If LRAC is falling when output is increasing, then the firm is experiencing economies of scale. When LRAC eventually starts to rise then the firm experiences diseconomies of scale, and, if LRAC is constant, then the firm is experiencing constant returns to scale.

The long-run average cost curve is comprised of a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. The LRAC curve will, therefore, be the least expensive average cost curve for any level of output.

Market Entry and Exit in the Long Run

The number of firms in an industry is variable in the long run, as competitors may enter or exit an industry depending on the levels of profit previously seen by companies operating in that industry. A firm may decide to enter a market in response to expected profits, or exit a market in response to expected losses. The profit expectations in a market may be due to a change in consumers’ sensitivity to price changes, thus, price elasticity of demand in the long run may vary.

Conversely, barriers to entry prevent competitors from quickly entering a market in the short run.

  1. Long-Run Average Total Cost - LRATC

    Long-run average total cost is a calculation that shows the average ...
  2. Minimum Efficient Scale

    The minimum efficient scale is the least amount of production ...
  3. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
  4. Unit Cost

    Unit cost is the cost incurred by a company to produce, store ...
  5. Learning Curve

    The learning curve is a concept that describes how new skills ...
  6. Aggregate Supply

    Aggregate supply is the total supply of goods and services produced ...
Related Articles
  1. Insights

    Explaining Minimum Efficient Scale

    Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.
  2. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  3. Investing

    Bond yield curve holds predictive powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  4. Investing

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  5. Investing

    Interest Rates and Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  6. Trading

    Adjusting A Long Call Into A Butterfly Spread

    There are many key advantages offered to options traders who deal only in the underlying securities.
  7. Insights

    Understanding The Treasury Yield Curve Rates

    Treasury yield curves are a leading indicator for the future state of the economy and interest rates.
  8. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  9. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  1. Do production costs include all fixed and variable costs?

    Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>
  2. How do economies of scale work with globalization?

    Discover how globalization can lead to unprecedented economies of scale for firms across the world, leading to higher global ... Read Answer >>
  3. What is a diseconomy of scale and how does this occur?

    Take a deeper look into diseconomies of scale, the economic phenomenon that can make companies less efficient as they become ... Read Answer >>
  4. Why are there no profits in a perfectly competitive market?

    See why economic profits are theoretically impossible in a perfectly competitive market and why some economists use perfect ... Read Answer >>
  5. What is the Difference Between Variable Cost and Fixed Cost in Economics?

    Learn what total costs are comprised of, what variable costs and fixed costs are, and the main difference between them. Read Answer >>
  6. What's the difference between production cost and manufacturing cost?

    Learn more about fixed and variable expenses incurred by businesses. Find out how production and manufacturing costs impact ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center