LONG-RUN COST CURVES

 Cost curves appropriate for long-run analysis are

more varied in shape than short-run cost curves and
fall into three broad classes. In constant-cost
industries, average cost is about the same at all
levels of output except the very lowest. Constant
costs prevail in manufacturing industries in which
capacity is expanded by replicating facilities without
changing the technique of production, as a cotton
mill expands by increasing the number of spindles. 
 In decreasing-cost industries, average cost
declines as the rate of output grows, at least until
the plant is large enough to supply an appreciable
fraction of its market. Decreasing costs are
characteristic of manufacturing in which heavy,
automated machinery is economical for large
volumes of output. Automobile and steel
manufacturing are leading examples.
 Decreasing costs are inconsistent with
competitive conditions, since they permit a few
large firms to drive all smaller competitors out of
business. Finally, in increasing-cost industries
average costs rise with the volume of output
generally because the firm cannot obtain
additional fixed capacity that is as efficient as the
plant it already has. The most important examples
are agriculture and extractive industries.
CRITICISMS OF THE THEORY

 The theory of production has been subject to

much criticism. One objection is that the concept
of the production function is not derived from
observation or practice. Even the most
sophisticated firms do not know the direct
functional relationship between their basic raw
inputs and their ultimate outputs.
 This objection can be got around by applying the
recently developed techniques of linear
programming, which employ observable data
without recourse to the production function and
lead to practically the same conclusions. Only the
simplest aspects of the theory were described
above. Without much difficulty it could be
extended to cover firms that produce more than
one product, as almost all firms do.
 With more difficulty it could be applied to firms
whose decisions affect the prices at which they
sell and buy (monopoly, monopolistic
competition, monopsony). The behavior of other
firms that recognize the possibility that their
competitors may retaliate (oligopoly) is still a
theory of production subject to controversy and
research