What are Short Run Production Costs?
The main motive of every shop that you come across whether it is a small mom and pop shop you see to the big showrooms you come across is to make money. Everyone in this one wishes to make money, so are these shops. They may have a lot of thoughts in their mind and more motives also but everything ends up on making more money. So whether it is about a small shop or a big company it is all about making money to fulfil their own demands.
So, in order to fulfil their motive of making more money all the companies require to be logical and more realistic. For that they focus on this short production cost. Now what is this short production cost? Actually for short production cost let us know first what is Short Run Production. Short run production can be completed taking in consideration the fact that one of the components or factors of the production is fixed. If we consider that why actually are we provided with this short term production or what is the necessary of having this short run production. So this short run production is basically tells about the physical ability of a production to produce, but it can be considered as an another way around too like you can say that the companies have these short run production just in order to fulfil the contracts that are in their hand at a time, that is, it is necessary to complete the contracts at a given particular time.
A contract doesn't need to be a formal contract or a formal document or file or some really big official contract and all that. Even if you go to a coffee shop or pizza shop and order your delicacies and after having them you paid to the owner or to the person who served or provided you with this then in the eyes of economists this also comes under your contract. You can say that it comes under short production because see,, you went to the shop to order your delicacy and the person gets paid. He has the fixed production he provided to you and in return he received money that was his actual motive, that is, to get more money.
In order to get the knowledge of short term production it would be easy and advantageous for a firm to realize what Does this short term production comprises. This article below will give you the detail that you need to understand this short term production.
Short-run production costs mean that the quantity of one production factor or input remains fixed, while other factors may vary. In short run cost, production factors such as machinery and land remain unchanged.
On the other hand, other production factors, such as capital and labour, may vary. Hence, a firm may increase its productivity by expanding capital or labour. It is in this aspect that the short run cost differs from long-run costs.
In long-run costs, there is no concept of fixed factors. In a more extended period, contractual wages, the general level of price, etc., are adjusted according to the state of the economy. No such adjustments can occur in the short run.
Different Types of Short Run Cost
There are primarily three types of short run costs –
Short Run Total Cost
The total cost borne by a firm for the production of a given level of output is referred to as short-run total cost. It comprises two components – Total Fixed Cost (TFC) and Total Variable Cost (TVC). The short run cost is found out by adding the total variable cost with the total fixed cost.
As the TFC remains constant, all changes in the short-run total cost are due to the changes in the total variable cost.
The short run cost curve is depicted as –
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Short Run Average Cost
Short Run Average Cost (SRAC) includes the cost of per unit output at various production levels of a firm. The calculation of average cost is done by division of the total cost of the produced units.
The short-run average cost curve has a U-shape, which initially declines, then hits the minimum, and then increases. The short-run average cost curve is depicted below.
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The curve of SRAC shows the average cost for production within the short run. The Downward slope of the curve indicates that there will be an increase in output consistent with a decrease in the average costs.
Short Run Marginal Cost
The marginal cost is shown by any change in total cost when divided by the total output alterations. In such an instance, the short-run marginal cost includes variation in short-run total cost owing to output change.
In the short-run marginal cost curve, the short-run total cost is situated on the slope. It indicates the change rate in total cost for changes in output. It is the marginal cost that imparts information on whether additional units should be produced by the firm.
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FAQs on Short-Run Production Costs Explained
1. What are short-run production costs in Economics?
In economics, the short run is a period where at least one factor of production is fixed, while others are variable. Consequently, short-run production costs are the total expenses a firm incurs during this period. These costs are composed of two main types: fixed costs (e.g., rent for factory space, machinery costs) which do not change with the level of output, and variable costs (e.g., raw materials, wages for hourly labour) which do change with output.
2. What are the different types of costs a firm faces in the short run?
A firm encounters several types of costs in the short run, which help in analysing its production decisions. These are:
- Total Fixed Cost (TFC): Costs that remain constant regardless of the output level.
- Total Variable Cost (TVC): Costs that vary directly with the level of output.
- Total Cost (TC): The sum of TFC and TVC (TC = TFC + TVC).
- Average Fixed Cost (AFC): The fixed cost per unit of output (AFC = TFC/Q).
- Average Variable Cost (AVC): The variable cost per unit of output (AVC = TVC/Q).
- Average Total Cost (ATC) or Average Cost (AC): The total cost per unit of output (AC = TC/Q).
- Marginal Cost (MC): The additional cost incurred to produce one more unit of output.
3. How do short-run costs differ from long-run costs?
The primary difference lies in the flexibility of production factors. In the short run, at least one factor (like capital or plant size) is fixed, meaning a firm can only increase output by changing its variable factors (like labour). In the long run, all factors of production are variable. A firm has enough time to alter its plant size, build a new factory, or adopt new technology, meaning there are no fixed costs in the long run.
4. Can you provide a real-world example of short-run costs for a business?
Consider a local bakery. Its fixed costs in the short run include the monthly rent for the shop, the loan payments on its ovens, and the salary of the permanent manager. These costs must be paid even if the bakery produces zero cakes. The variable costs include the cost of flour, sugar, eggs, and the wages paid to bakers who are hired on an hourly basis. These costs increase as the bakery produces more cakes.
5. Why are the short-run Average Cost (AC) and Marginal Cost (MC) curves typically U-shaped?
The U-shape of the short-run AC and MC curves is explained by the Law of Variable Proportions (or the Law of Diminishing Marginal Returns). Initially, as more variable inputs (like labour) are added to a fixed input (like a factory), efficiency increases, leading to increasing marginal product and falling marginal cost. After a certain point, the fixed factor becomes overcrowded, leading to diminishing marginal returns. This causes the marginal product to fall and the marginal cost to rise, giving both curves their characteristic U-shape.
6. What is the relationship between Marginal Cost (MC) and Average Cost (AC) in the short run?
The relationship between MC and AC is purely mathematical and crucial for understanding a firm's efficiency.
- When MC is less than AC (MC < AC), the AC curve falls. This is because adding a unit that costs less than the average pulls the average down.
- When MC is greater than AC (MC > AC), the AC curve rises. Adding a unit that costs more than the average pushes the average up.
- When MC equals AC (MC = AC), the AC is at its minimum point. This is why the MC curve always intersects the AC curve at its lowest point.
7. How does an increase in the price of a variable input, like wages, affect the short-run cost curves?
An increase in the price of a variable input like wages directly impacts the costs that change with output. Therefore, the Total Variable Cost (TVC), Average Variable Cost (AVC), and Marginal Cost (MC) curves will all shift upwards. Since Total Cost (TC) is the sum of TFC and TVC, the TC curve will also shift upwards. However, the Total Fixed Cost (TFC) and Average Fixed Cost (AFC) curves will remain unchanged because they are independent of variable input prices.
8. Why does the Average Fixed Cost (AFC) curve continuously fall but never become zero?
The Average Fixed Cost is calculated as Total Fixed Cost divided by Output (AFC = TFC/Q). The Total Fixed Cost (TFC) is a positive constant value (e.g., rent). As a firm increases its output (Q), this fixed sum is spread over a larger number of units. This causes the AFC to continuously decline. However, since TFC is a positive number, dividing it by any amount of output (Q), no matter how large, will always result in a value greater than zero. Therefore, the AFC curve approaches the x-axis but never touches or crosses it, a shape known as a rectangular hyperbola.
