than the market price, then the firm would be earning profits if fixed costs are left out of the picture.

7.4 Production in the Long Run

In the long run, all inputs are variable. Since diminishing marginal productivity is caused by fixed capital,

there are no diminishing returns in the long run. Firms can choose the optimal capital stock to produce their

desired level of output.

7.5 Costs in the Long Run

A production technology refers to a specific combination of labor, physical capital, and technology that makes

up a particular method of production.

In the long run, firms can choose their production technology, and so all costs become variable costs. In

making this choice, firms will try to substitute relatively inexpensive inputs for relatively expensive inputs

where possible, so as to produce at the lowest possible long-run average cost.

Economies of scale refers to a situation where as the level of output increases, the average cost decreases.
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