In the long run all factors are variable. Therefore, the producer can operate without facing the constraints of the fixed factors. The long-run cost (LAC) is not more than the short-run cost (SAC) because the unconstrained minimum average cost at any output cannot be more than the constrained minimum.

Another point that we should note is that at any output other than that at the minimum point of the LAC curve, the firm operates at a point on the downward-sloping or the upward-sloping portion of its plant curve (i.e., SAC curve), not at the minimum point of the latter.

For example, if the firm wants to produce q = q, along the downward-sloping portion of its LAC curve, it would find that it is better to operate on the downward-sloping portion of plant curve 2 than to operate at the minimum point of plant curve 1, for average cost in the former case is smaller than that in the latter case.

Let us note at this point that the output at the minimum point of the plant curve is considered to be the capacity of the plant. So the capacity is not the maximum possible output that the plant can produce.

If a producer produces an output which is smaller than the capacity output, he is said to be operating with excess capacity, and if he produces an output which is larger than the capacity output, then he operates above capacity.

In Fig. 9.17, we see that the firm would produce any output q = q1 along the downward sloping portion of its LAC curve at point F on plant 2 where it would have excess capacity instead of producing the output at point E on plant 1 where it would be operating on capacity because the average cost in the former case is smaller than that in the latter case.

Now how can we explain this? Why would the firm operate with excess capacity? Apparently, here is a paradox.