SHORT RUN AND LONG RUN COSTS

Short Run Costs (SRCs)

Short run costs are costs which a firm incurs during its short run period. And they comprise two major types of cost:

  1. Fixed costs.
  2. Variable cost.

The short-run cost may also be defined as that period of time in which some of the firm’s productive factors like building, capital, equipment, etc. and costs are fixed and some are variable. It is a period of time in which certain equipment, resources and commitments of the firm are fixed but not long enough for the firm to vary its output in response to demand by hiring more or fewer variable factors of production such as labour and raw materials.

In order to be in production during the period of short run, the firm must be able to cover its variable costs. If the price of the product is equivalent to the marginal cost, it will lead to low profit unless its average variable cost is covered. Any price below the average variable cost, the firm will run at a loss, and any price above the average variable cost, the firm will be able to cover its fixed costs.

 

Long Run Costs (LRCs)

Long run costs are costs which a firm incurs in the long run. In the long run all firm’s costs are variable costs. That is, the costs termed fixed in the short run become variable costs in the long run.

The long-run cost may also be defined as a period of time in which all factor input in a production process are variable. While the short-run decisions deal with the operation of existing productive capacity, long period decisions are concerned with investment, that is, changes in the productive capacity. The long run is a planning period towards which an entrepreneur makes his plans and chooses the plant size that is best for his operations.

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