Short Run Production Costs

Bookmark added to your notes.
View Notes

What is Short Run Production Costs?

Short-run production costs mean that 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. The figure below exhibits the relationship between the short run and long-run costs. 

[Image will be Uploaded Soon]

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 –

[Image will be Uploaded Soon]

  • 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. 

[Image will be Uploaded Soon]

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.  

To know more about short run Economics, you can avail Vedantu’s online classes. Download the app now!

FAQ (Frequently Asked Questions)

1. What is Included in the Short Run Cost?

Ans. Within short run cost, at least one production factor remains fixed while the rest may be variable. It means that level of output can only be increased by enhancing the variable factors such as raw materials, labour, etc. On the contrary, other factors, such as capital, remains unaltered. Hence, short run costs comprise of both fixed cost as well as a variable cost.

2. What are the Differences Between the Short Run and Long-run Cost?

Ans. In the case of the short run, a production factor remains fixed, for instance, capital. Hence, to increase output, more labour can be employed, but capital cannot be increased. It leads to diminishing marginal returns. Also, there may not be equilibrium seen in wages and prices. 

On the contrary, all main production factors become variable in the long run. There is no fixed factor. In long run, a firm is presumed to have enough time and resources at its disposal to acquire more capital, leave or enter a market, make price adjustments, etc.

3. What is Indicated in a Short Run Cost Curve?

Ans. Short-run cost curve exhibit a U-shape on account of diminishing returns. This diminishing return is due to a fixed factor of production, that is, capital. The curve indicates that, at a given point, even with an increase in labour, productivity will decline. Hence, by engaging a more number of labour, the marginal costs would increase.