Short Run Cost

Topics: Costs, Economics of production, Variable cost Pages: 5 (1595 words) Published: August 2, 2012
* Short Run Costs
A period of time in which the quantity of some inputs cannot be increased beyond the fixed amount that is available. For example, what quantity of inventory to order is a short run decision. Whether or not to build a new factory would be considered a long run decision.

1. Total fixed Coast

The total fixed cost curve graphically represents the relation between total fixed costs incurred by a firm in the short-run production of a good or service and the quantity produced. Because total fixed cost is fixed, the total fixed cost curve is a horizontal line.

e.g. Company may work on rent that rent per month will remain fixed; other example is salary insurance. These factors are not related to output. 2. Total Variable Costs
Variable costs are corporate expenses that vary in direct proportion to the quantity of output. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts. Examples of common variable costs include raw materials, packaging, and labor directly involved in a company's manufacturing process.

3. Total Cost
Total Cost is the sum of the Total Fixed Costs (TFC) & Total Variable Coasts (TVC) 4. Average Costs Production
Average cost is the summation of the AFC & AVC
Average fix cost is equal to total fixed cost divided by the number of goods produced & average Variable cost is equal to total Variable cost divided by the number of goods produced

As we can observed from diagram TFC does not change when output changes, but Q can changes even in the short run. AFC changes in opposite direction compared to Q, but in same proportion. However the TVC and therefore, AVC can vary depending upon output changes. It may be noted that as more and more output is produced, the fixed costs get spread over larger volume, but variable costs starts going up because of withdrawing returns to factors. It is cumulative of AFC and AVC which decides average costs AC. As output goes increasing AC goes down up to particular quantity after that AC increased due to more & more consumption of raw material & labor.

5. Marginal Costs of Production
Marginal Costs MC is the change in TVC and therefore, it varies with AVC in a linear total cost function, the MC=AVC E.G. TC = 100+5Q
d(TC) = MC =5 dQ Following the average marginal rule, as the AVC falls, MC falls faster than AVC. As the AVC reaches a minimum, the MC coincides with AVC level. As the AVC starts rising the MC rise faster ahead of AVC. Thus MC passes through the minimum point of the AVC. At point S if the price happens to be equal yo min. AVC=MC it is called Break Even Point (B). In practices variable costs remain proportionate to total output up to a point at which total plant capacity is reached. Any attempt to increase output beyond the rated plant capacity results in a sharp increase in variable costs. * Long Run Costs:-

The long run is a period of time during which the firm can alter size and organization to changing the demand conditions. In other words in the long run the firm can adjust its scale of operation or size of plant to produce any required output in the most efficient way. Thus in the long run the fixed factor can be alter. Capital can be used differently. In short, all factors are variable in the long run and therefore the scale of operation can be altered. The Long run is often referred to as the Planning perspective because the firm can build the plant that minimizes the cost of producing any anticipated level of output. Long Run Average Cost Curve

The long run avg. coast curve derived from a no. of short term avg. coat SAC. When the firm produces the Q1 level of output, it uses the...
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