Page 127 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 8.1: Short Run Total Cost Curve

Total cost curve (TC) has been obtained by adding up 'vertically' the total fixed cost curve and
total variable cost curve because the total cost is a sum of total fixed cost and total variable cost.
The shape of the total cost curve (TC) is exactly the same as that of total variable cost curve (TVC)
because the same vertical distance always separates the two curves.

8.3 Short Run and Long Run Costs

The short run is a period of time in which the output can be increased or decreased by changing
only the amount of variable factors such as labour, raw materials, chemicals, etc. In the short run
the firm cannot build a new plant or abandon an old one. If the firm wants to increase output in
the short run, it can only do so by using more labour and more raw materials. It cannot increase
output in the short run by expanding the capacity of its existing plant or building a new plant
with larger capacity. Long run, on the other hand, is defined as the period of time in which the
quantities of all factors may be varied. All factors being variable in the long run, the fixed and
variable factors dichotomy holds good only in the short run. In other words, it is that time-span
in which all adjustments and changes are possible to realise.
Short run costs are those costs that can vary with the degree of utilisation of plant and other fixed
factors. In other words, these costs relate to the variation in output, given plant capacity. Short
run costs are therefore, of two types: fixed costs and variable costs. In the short run, fixed costs
remain unchanged while variable costs fluctuate with output. Long run costs in contrast are
costs that can vary with the size of the plant and with other facilities normally regarded as fixed
in the short run. In fact, in the long run there are no fixed inputs and therefore, no fixed costs, i.e.,
all costs are variable.

8.3.1 Short Run Average Costs and Output

The cost concept is more frequently used both by businessmen and economists in the form of
cost per unit or average cost rather than as totals. We, therefore pass on to the study of short run
average cost curves.

Short Run Average Fixed Cost (AFC)
Average fixed cost is the total fixed cost divided by the number of units of output produced.
Therefore,
TFC
AFC
Q
where Q represents the number of units of output produced.

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