Short-Run vs Long-Run Costs Curves: Meaning and Key Comparison

Cost curves of a firm reflect the relationship which the firm production cost pertains to volume of output. Short-run cost curves are associated with that period of time over which at least one factor of production remains constant, while long-term cost curves relate all factors being variable. These curves are very important for planning production and managing costs.

The long period varies according to the company and is often more than a year. The company absorbs the market changes and profit and loss cycles over a longer period. Both these time frames have different costs, leading to the short run and long run cost curves. 

Mapping costs and production output is an essential economic topic affecting business operations. It constitutes a part of the UGC NET Commerce Exam syllabus. This portion can be asked in several formats in the examination.

In this article, the readers will be able to know about the following:

• Short Run and Long Run Cost Curves- Introduction
• Relationship Between Short Run and Long Run Cost Curves
• Formulas in Short-Run and Long-Run Cost Analysis
• Difference Between Short Run and Long Run Cost Curves

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Short Run and Long Run Cost Curves- Introduction

In economics, businesses incur costs when they produce goods and services. The short run is a period where some factors of production are fixed, and others can change. In the short run, businesses can only adjust certain things like labor or raw materials. The long run is a time period where all factors of production can be changed, like machines and buildings. Short-run cost curves describe changes in costs resulting from some variable factors changing, while long-run cost curves trace the way changes in costs affect a business able to vary anything. Knowing such curves aids production planning and deciding how best to reduce costs for higher profits.

Fig: short run and long run cost curves

Short-run and long-run cost curves help businesses understand their expenses. The short run is a period where some things are fixed, and others can be changed. The long run is when everything can be adjusted. Both curves are important for businesses to make good decisions. When short run cost curve and long run cost curve when studied together is better understood.

Short Run Cost Curve

In the short run, some factors like buildings or machines cannot be changed. Businesses can only adjust things like the number of workers. As they increase production, costs rise because they may need more resources. The short-run cost curve shows this change in costs. It starts low, rises as production increases, and eventually may increase quickly. This curve helps businesses understand how much it costs to produce goods with limited changes.

Long Run Cost Curve

In the long run, businesses can change all factors, such as machines, buildings, and the number of workers. They can adjust everything to find the most cost-efficient way to produce. The long-run cost curve is usually lower than the short-run curve. This is because businesses can make better decisions and save on costs. It shows that over time, there is a means to reduce cost of production by businesses. This long-run curve will help business firms in making long-run growth and efficiency. 

Formulas in Short-Run and Long-Run Cost Analysis

Understanding cost behavior is key for businesses to optimize production and profitability. Let’s explore the key cost formulas, their meanings, and numerical examples in both the short run and long run.

Short-Run Cost Formulas

In the short run, some inputs are fixed (e.g., capital, plant), while others (e.g., labor, raw materials) vary with output. Costs are divided into Fixed Costs (FC) and Variable Costs (VC).

Total Cost (TC)

Formula: TC=TFC+TVC

• TFC (Total Fixed Cost): Does not change with output
• TVC (Total Variable Cost): Changes with output

Example: A firm has fixed costs of ₹5,000. For producing 100 units, the variable cost is ₹10,000.

TC=₹5,000+₹10,000=₹15,000

Average Fixed Cost (AFC)

Formula: AFC = TFC / Q

Example:AFC= ₹5,000/ 100 =₹50 per unit

Average Variable Cost (AVC)

Formula: AVC= TVC/Q

Example: AVC=₹10,000/ 100 =₹100 per unit

Average Total Cost (ATC)

Formula: ATC=TC / Q orATC=AFC+AVC

Example: ATC= ₹15,000/ 100 =₹150 per unit

Marginal Cost (MC)

Formula: MC= ΔTC / ΔQ

• It shows the change in total cost when one more unit is produced.

Example: If TC increases from ₹15,000 to ₹15,300 when output increases from 100 to 101 units:
MC= (₹15,300−₹15,000) / (101−100) =₹300

Long-Run Cost Formulas

In the long run, all costs are variable. There are no fixed inputs; firms can scale all resources up or down. The focus here is on achieving optimal efficiency.

Long-Run Total Cost (LRTC)

• There’s no specific formula since it depends on the scale of production and input combinations.
• It is derived from selecting the least-cost combination of inputs for each output level.

Long-Run Average Cost (LRAC)

Formula: LRAC= LRTC/ Q

• The LRAC curve is U-shaped, reflecting economies and diseconomies of scale.

Example: If the cost of producing 1,000 units in the long run is ₹80,000:
LRAC=₹80,000/ 1,000 =₹80 per unit

Marginal Cost in Long Run (Same as Short Run)

Formula: LMC= ΔLRTC/ ΔQ

Example: If LRTC rises from ₹80,000 to ₹84,000 when output increases from 1,000 to 1,100 units:
LMC=₹84,000−₹80,000/ 100 =₹40 per unit

Difference Between Short Run and Long Run Cost Curves

The short-run and long-run cost curves show changes in the cost of production. In the short run, some things are fixed, whereas in the long run, everything can be adjusted. The short-run cost curve is usually higher because firms cannot change everything, but the long-run cost curve is lower since businesses have more flexibility to adjust all factors of production.

Conclusion

The theory of cost short run and long run cost curves is essential to understand their application and implications in the business. Both long run cost curve and short run cost curves are dependent on cost variables and affect the optimum production levels in a company. Every company has to manage its costs and find the levels where it makes the maximum profit. The analysis of short run and long run cost curves helps managers understand where they need to invest money or cut resources to reach the highest profit level.

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