Production costs of any business helps determine returns and the scope of expansion. Several elements that contribute to the production cost vary from company to company. These factors can be fixed or variable depending on the production’s time period and output scale. Short run and long run costs determine production efficiency and help to understand how to improve the operational costs of an organisation.
Read on to learn the different types of short run and long run cost
It is the cost incurred in production during a fixed period of time when all the factors and inputs vary, except one. Assessing the short run costs of an organisation or an economy helps us to study how it behaves in response to sudden environmental changes.
Long Run Cost is the minimum cost at which a certain level of output can be achieved in the long run when all factors of production are variable.
These costs enable a business to understand its asset value and make necessary improvements in the production cycle. As a result, this helps organisations analyse their factors of production and expand or reduce their operational costs accordingly.
|Short Run Cost||Long Run Cost|
|In the short run, a firm is constrained by at least one fixed input, such as a factory or specialized labor.||In the long run, all inputs can be adjusted, and a firm has more flexibility to optimize its production process for maximum efficiency.|
|A firm’s costs are partially fixed and partially variable.||In the long run, a firm’s costs are entirely variable|
|Fixed costs cannot be changed in the short run, while variable costs can be adjusted to some extent||The firm can adjust all inputs, including land, labor, capital, and raw materials, to minimize its costs and maximize its output.|
There are primarily three types of short run costs. It should be kept in mind that these costs are crucial to determine the long run costs of a company.
Short run total cost is a company’s total cost of production for a given output. It is further divided into two types which are total fixed and variable costs. The total sum of these two elements determines the STC.
SAC is the average cost of a given production of a company in the short run. It is the average cost per unit when all inputs are variable except one. Short run total cost divided by output equals SAC.
It is the additional cost incurred to produce a certain output. SMC is incurred when there is a change in total cost due to a change in production input costs. It is calculated by dividing the total cost by the change in total output.
Long Run Cost (LRC) can be divided into three primary types:
The minimum cost required to produce a particular quantity of commodity with variable factors of production is LTC.
LAC can be described as the average cost to produce a particular quantity of commodity when all factors of production are variable. It is the LTC divided by the output level, which derives a per-piece cost of the total output.
It depicts the additional costs a company incurs to expand its factors of production when all units are variable. LMC is the extra cost of expanding a plant or facility.
A long run total cost curve (LRTC) is a graph representing the total cost of production of a certain unit and its relation with the average cost. It is an S-shaped curve with the total cost on one axis and the produced quantity on the other axis.
In the image below, you can see the representation of an LTC Curve.
The short run total cost curve (STC) shows a firm’s total cost of production as output increases, assuming at least one factor of production is fixed. It’s a U-shaped curve, with costs initially rising as output increases, but eventually slowing down and reaching a minimum point known as the shutdown point.
Here is an example of Short Run Total Cost Curve
Both short run and long run cost curves are essential economic tools to assess the cost of production of an organisation. This, in turn, helps to develop a more efficient production process and improve profitability.
Although these two costs are quite closely dependent on each other, they have their own share of differences.
Long Run Cost determines the efficiency of a company’s production process and scale for expansion. In contrast, short run costs help to understand the performance of a company or an economy in a short time period.
Short run cost and long run cost are effective tools of economics, essential to assess the cost of production process of an organisation. The various types of production costs are essential to calculate the profitability of a company.
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Long run strategies are effective in reducing cost of production; however, they are not perfect. The risks of long run cost reduction strategies are:
• These strategies are not feasible for a long period of time.
• The strategies are constructed with the objective of short term goals.
• Long run strategies are tough to apply practically.
In long run cost, all the factors of production are variable, whereas, in the short run cost, at least one factor of production is fixed.
With the help of technology, companies can apply modern resources and methods to automate tasks, reduce labour costs and boost the production process. Hence, technology plays a great role in improving the cost of production.
The short run cost can be divided into two parts: total variable cost (TVC) and total fixed cost (TFC). The total cost is the addition of these two parts. Thus, the formula for short run total cost is TVC+TFC.
No, all costs are variable in the long run. Over a long time period, a business can add several aspects to the production processes, which will have a significant impact on the costs. Thus, none of the costs are fixed in the long run.
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