# Understanding the Long Run in Economics: How It Works and Key Examples

> **Definition**
>
> The economic term "long run" refers to an extended period during which production factors and costs in an economy are variable, allowing for adjustments to occur.

## What Is the Long Run?

"The long run" is an economic term that refers to a theoretical future situation wherein all factors of production and costs are variable. There are also a variable number of producers in the market, which means firms are able to enter and leave the market during times of profitability and loss. In the long run, firms aim to minimize costs and can adjust to changes in supply and demand.

Key concepts include the long-run average cost (LRAC) curve and economies of scale, which highlight how businesses can expand production efficiently. In the long run, profits are ordinary, so there are no economic profits.

### Key Takeaways

*   In the long run, all factors of production and costs are variable, allowing flexibility in operations.
*   Firms aim to minimize cost per unit along the Long-Run Average Cost (LRAC) curve.
*   Economies of scale occur when increasing output reduces the cost per unit.
*   The long run contrasts with the short run, where some factors are fixed.
*   Perfect competition in the long run can eliminate economic profits due to market entry and exit.

![Long Run: A period of time where all factors of production and costs are variable.](https://www.investopedia.com/thmb/H7gATP0Hd2fFrbTyMypVgnQzwyE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Longrun_final-0a54e511165c4539ba930875983dc04b.png)

*Since the costs are variable in the long run, firms have the option to make adjustments to the way it operates. — Investopedia / Michela Buttignol*

## Mechanics of Long Run Economics

The term long run is used to describe an economic situation in which a manufacturer or producer is flexible in its production decisions. This situation is characterized by variable inputs, including [capital](https://www.investopedia.com/terms/c/capital.asp), labor, materials, and equipment, among others.

In the long run, businesses can expand or reduce their production [capacity](https://www.investopedia.com/terms/c/capacity.asp). Firms can also enter or exit the industry based on expected profits. Firms understand that they cannot change their levels of production in order to reach an [equilibrium](https://www.investopedia.com/terms/e/equilibrium.asp) between supply and demand.

In [macroeconomics](https://www.investopedia.com/terms/m/macroeconomics.asp), the long run is when prices, wage rates, and expectations fully adjust to the economy. This stands in contrast to the short run, when these variables may not fully adjust. Long-run models may also shift away from short-run equilibrium, in which [supply and demand](https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp) react to price levels with more flexibility.

Firms can change production levels in response to expected economic profits. 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](https://www.investopedia.com/terms/p/product-line.asp).  

> **Important**
>
> The long run isn't about a set time. It's specific to each firm, industry, or economic factor.

## Understanding Long-Run Average Cost (LRAC) in Economics

In the long run, companies seek production methods that let them produce goods at the lowest cost. If a company is not producing at its lowest cost possible, it may lose [market share](https://www.investopedia.com/terms/m/marketshare.asp) to competitors that are able to produce and sell at minimum cost.

The long run is associated with the [long-run average cost (LRAC)](https://www.investopedia.com/terms/l/lratc.asp), 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 quantity of output in the long run.

The LRAC curve includes several SRAC curves, each representing a specific level of [fixed costs](https://www.investopedia.com/terms/f/fixedcost.asp). Thus, the LRAC curve is the cheapest average cost curve for all output levels. As long as the LRAC curve is declining, then internal economies of scale are being exploited.

> **Fast Fact**
>
> The long-run average cost can also be called the long-run average total cost.

### Economies of Scale: Benefits and Implications in the Long Run

[Economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) occur when increased output lowers the cost per unit. 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](https://www.investopedia.com/terms/e/efficiency.asp) 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.

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](https://www.investopedia.com/terms/d/diseconomiesofscale.asp), and if LRAC is constant then the firm is experiencing constant returns to scale.

## Comparing Long Run and Short Run Dynamics

The long run is the opposite of the [short run](https://www.investopedia.com/terms/s/shortrun.asp). This is an economic situation wherein firms want to meet a goal or target within a short period of time when demand for a product or service increases.

Unlike the long run, the short run involves at least one [factor of production](https://www.investopedia.com/terms/f/factors-production.asp) that is fixed while all the others are variable while the costs are fixed so there is no equilibrium between these factors. This means there is no flexibility when it comes to the inputs or outputs since the costs are fixed.

While ordinary profits are typical of the long run, the short run allows firms to realize economic or exceptional profits.  

## Illustrative Example: Long Run in Practice

Consider a business with a one-year lease. The long run begins after a year, as the lease no longer restricts them. In the long run, the amount of labor, size of the factory, and production processes can be altered if needed to suit the needs of the business or lease issuer.  

## Why Is the Long Run Important in Economics?

The long run is an economic situation where all factors of production and costs are variable. It demonstrates how well-run and efficient firms can be when all of these factors change.

## What Eliminates Economic Profits in the Long Run?

There is perfect competition in the long run. This means that firms can easily enter the market. Since there is the possibility of having an infinite number of competing firms in the same space, profits can easily be eliminated. Keep in mind, though, that companies can also easily leave the market, wiping out losses, too.

## What Are Some of the Benefits of the Long Run?

Since the costs are variable in the long run, firms have the option to make adjustments to the way it operates. So when the need arises, it can increase or decrease operations. Furthermore, they can decide how best to shape their factors of production in order to reduce costs.

## The Bottom Line

The long run is a situation where companies can operate under variable production factors. Because these inputs aren't fixed, costs are also variable, giving firms the flexibility to adjust production and keep costs down.

This flexibility also allows them to aim for the lowest point on the long-run average cost (LRAC) curve and benefit from economies of scale as output grows. Unlike the short run, where some inputs remain fixed, the long run lets all inputs adjust. But there is a downfall: there is usually perfect competition, which means there is no chance for exceptional profits even as the market stays efficient.