<P> The long - run marginal cost curve is shaped by returns to scale, a long - run concept, rather than the law of diminishing marginal returns, which is a short - run concept . The long - run marginal cost curve tends to be flatter than its short - run counterpart due to increased input flexibility as to cost minimization . The long - run marginal cost curve intersects the long - run average cost curve at the minimum point of the latter . When long - run marginal costs are below long - run average costs, long - run average costs are falling (as to additional units of output). When long - run marginal costs are above long run average costs, average costs are rising . Long - run marginal cost equals short run marginal - cost at the least - long - run - average - cost level of production . LRMC is the slope of the LR total - cost function . </P> <P> Cost curves can be combined to provide information about firms . In this diagram for example, firms are assumed to be in a perfectly competitive market . In a perfectly competitive market the price that firms are faced with would be the price at which the marginal cost curve cuts the average cost curve . </P> <P> Assuming that factor prices are constant, the production function determines all cost functions . The variable cost curve is the inverted short - run production function or total product curve and its behavior and properties are determined by the production function . Because the production function determines the variable cost function it necessarily determines the shape and properties of marginal cost curve and the average cost curves . </P> <P> If the firm is a perfect competitor in all input markets, and thus the per - unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale (i.e., is operating in a downward sloping region of the long - run average cost curve) if and only if it has increasing returns to scale . Likewise, it has diseconomies of scale (is operating in an upward sloping region of the long - run average cost curve) if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale . In this case, with perfect competition in the output market the long - run market equilibrium will involve all firms operating at the minimum point of their long - run average cost curves (i.e., at the borderline between economies and diseconomies of scale). </P>

Average cost curve and average variable cost curve