SHORT-RUN AND LONG-RUN COSTS
Short-run cost: The short-run cost may be defined as that period of time in which some of the firm’s productive factors like building, capital, equipment 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 are 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 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.
It is recommended that when a firm’s average cost is greater than its price, the firm should stay open in the short run if price is greater than AVC.
Such firm should shut down in the long run. This is because any further production will add to losses in the long run.
Long-run cost: The long-run cost is 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 productivity capacity, long run is a planning period towards which entrepreneurs as plans and chooses the plant size that for his operations.