How Producers act in the Long Run


Producers have Long Run Costs

Recall that:

> In the short run some costs are fixed.
> In the long run fixed costs become variable.
> Consequently, a firm’s long-run cost curves differ from its short-run cost curves.
Long-Run Cost Minimization

Given that firms will select the most efficient method of production they will chose the combination of inputs (K&L), which minimize costs. This implies the following equilibrium:

MPk/Pk = MPl/Pk

**This is called the principle of substitution**

(That is: marginal product of capital/price = marginal product of labor/price)

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