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 is included in the short run cost?
Within the short run cost, at least one production factor remains fixed while the rest may be variable. It means that the 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, remain unaltered. Hence, short run costs comprise of both fixed cost as well as a variable cost. Short run production will basically give you the knowledge about a part of fixed production that the company or small firm can provide you at a time.
2. What are the differences between the short run and long-run cost?
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 the 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?
Short-run cost curves 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. An analysis of the decisions made by a firm in the short period of time can be decided by this curve. This curve is basically based to achieve the ultimate goal of explaining the law of supply and the upward sloping supply curve will help you in that. This curve will help the producer to decide what kind of price he needs to keep in order to get benefit.
4. Explain short term production with an example.
Short term production is easy; it involves having one variable component in the production process while all the other components are constant. Let's take an example that is the most common if a company has 30 units of land and along with it has 6 acres of land on which it needs to work. If the company uses one unit to work on the land for a time the ratio of land to labour is going to be 6:1 but from these 30 units now if the company decides to add 2 units on the land . Then now the ratio of land to labour would be 6:2 or a simplified version of this will be 3:1.
5. What actually happens in this short term production?
In simple language if we talk about this short run production then you should know that here one component provided to you will be variable in the production while the other components are going to be constant. In Economics this short rate of production explains to you that an economy behaves differently and it depends upon the time or the length of the time that it takes to reach a certain stimulus or more precisely a certain result.
