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(Long Run Production with Variable Inputs):

The long run is the lengthy period of time during with all inputs can be varied. There are no fixed output in the long run. All factors of production are variable inputs.

We now analyze production function by allowing two factors say labor and capital, to vary, while all others are held constant. With both factors (variable), a firm can produce a given level of output by using more labor and less capital or a greater amount of capital and less labor or moderate amounts of both. A firm continues to substitute one input for another while continuing to produce the same level of output.

If two inputs say labor and capital are allowed to vary, the resulting production function can be illustrated in the following diagram 12(a).

Diagram:

In the above diagram each curve (called an isoquant) represents a different level of output. The curves which lie higher and to the right, represent greater output levels than curves which are lower and to the left.

Explanation with Example:

For example, point D represents a higher output level of 250 units than point A or B which shows output level of 150 units.

The curve isoquant which represents 150 units of output illustrate that the same level of output (150 units) can be produced with different combinations of labor and capital. Combination of labor and capital represented by A, can employ OL1 quantity of labor and OC1 units of capital to produce 150 units of output.

The combination of labor and capital represented by point B will use only OL2 units of labor and OC1 of capital to produce the same level of output. Thus, if a country has surplus labor and less capital, it may use the combination of labor and capital represented by point A. In case the country has abundant capital and less labor, it might produce at point B. The isoquants through points A and B shows all the different combinations of labor and capital that can be used to produce 150 units of output.