In the very long run, a period where all inputs including factory size are adjustable, a high percentage of a manufacturing firm's total costs become variable costs.

Cost Composition of Manufacturing Firms in the Very Long Run

The 'very long run' is an analytical timeframe in economics where a firm can adjust all of its inputs, including those typically held constant in the long run, such as the size of its factory or its fundamental technology.

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The 'long run' is an analytical timeframe in economics where variables that were held constant (exogenous) in the short run are allowed to become endogenous, meaning they can be adjusted and are determined by the model. The analysis of a long-run equilibrium involves modeling the consequences of these adjustments. This concept does not describe a specific period of time but rather a modeling approach where a firm can adjust all its inputs, including its capital goods.

Long Run in Economics

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

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CORE Econ - The Economy 2.0: Microeconomics

The cost function for the Beautiful Cars firm is presented as a long-run model. This means it operates under the assumption that the firm can adjust all its inputs, including capital like equipment and its labor force, when it needs to change its production level. This complete flexibility in inputs is the reason the firm's marginal cost remains constant. The model defines the total cost as the sum of its fixed costs (F) and variable costs, which are directly proportional to the quantity of cars (Q) produced.

Long-Run Cost Function for Beautiful Cars

Very Long Run in Economics

In contrast to firms where most costs eventually become variable, certain types of firms are inherently structured to have substantial fixed costs that persist even within the long-run analytical framework.

Firms with High Long-Run Fixed Costs

In the long run, market structures are dynamic. When existing firms earn economic rents, or when an increase in market demand raises prices, it signals an opportunity for profit. This can lead to two main responses: current firms may invest in expanding their production capacity, and new firms may be attracted to enter the market. While a single firm's expansion might not affect the market price, collective expansion or the entry of new competitors increases the overall market supply. This supply increase leads to a new equilibrium, which could involve a lower price than the short-run peak after a demand shock. Conversely, firms sustaining losses may exit. The decision for new firms to enter is also dependent on the costs of entry not being prohibitively high.

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