Economics
Short Run Production Cost
Short run production cost refers to the expenses incurred by a firm in the short term to produce a specific quantity of output. It includes both fixed costs, which do not change with the level of production, and variable costs, which fluctuate with output. Understanding short run production costs is crucial for firms to make decisions about pricing, production levels, and profitability.
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11 Key excerpts on "Short Run Production Cost"
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
After you read this appli- cation about poor customer service, think about how that service could be improved. 326 Chapter 12 Production and the Costs of Production 1. The greatest portion of measured output in the U.S. economy comes through the business sector. Categories have been developed for classifying production. Producing sectors is a broad category that includes the services, manufacturing, and other sectors; industry is a narrower category that includes firms producing similar products or using similar processes. 2. A production function shows the output that results when a particular group of inputs is processed in a certain way. Firms have a choice of production functions and seek the least‐cost, or efficient, method for producing a desired quantity and quality of output in order to maximize profit. 3. The development of new productive inputs and techniques can come from technological change. Technological change can also lead to creative destruction: New inputs and processes cause those currently in use to become obsolete and some areas of an economy to grow while others decline. 4. The choice of a method of production is influenced by the time frame in which a business plans its operations. The short run is a time period in which some factors of production are variable in amount and some are fixed. The capabilities of the fixed factors, because they cannot be changed, serve as a boundary within which production takes place. The long run is a time period in which all factors are regarded as variable. 5. In the short run, the total cost of producing a certain level of output is found by adding total fixed cost and total variable cost. Total fixed cost is the same regardless of how much is produced; total variable cost increases as output increases. Average total cost is the cost per unit of output at a given level of production and is found by dividing total cost by the number of units of output produced.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
For the moment, understanding why cost varies with output exactly as it does in the example is not essential; our purpose is to introduce the terminology and explain the relationships among the various measures of cost. Measures of Short-Run Cost: Total Fixed and Variable Costs Recall that the short run is a period of time over which the firm is unable to vary all its inputs. Thus, some inputs are effectively fixed in the short run, whereas others are variable. There are, however, costs associated with the use of both fixed and variable inputs. Let’s examine Table 8.1, which shows how production cost varies at different rates of output for the firm. Total fixed cost (TFC) is the cost incurred by a firm that does not depend on how much output it produces. Fixed cost includes expenditures on inputs the firm cannot vary in the short run—normally, its plant and equipment. The fixed cost will be the same, regardless of how much output the firm produces; in particular, if the firm produces nothing, it still incurs its total fixed cost. In Table 8.1, the firm faces a total fixed cost of $60 per day. Total variable cost (TVC) is the cost incurred by a firm that depends on how much output it produces. This cost is associated with the variable inputs; more output requires the use of more variable inputs, so total variable cost rises with output. To produce more in the short run, the firm must hire more workers, use more electricity, purchase more raw materials, and so on—all of which add to total variable cost as output rises. Total variable cost is shown in column (2) of the table. Fixed versus Sunk Costs Note that fixed cost is not necessarily identical to the concept of sunk cost introduced in Chapter 1. A fixed cost is invariant to the output level selected by the firm; that is, the firm’s expenditures on its plant and equipment are a relevant cost of production even when output is zero.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
10 COSTS OF PRODUCTION Short Run and Long Run LAURENCE MINERS Fairfield University W hen most people other than economists think of costs, they may logically think about their household budget and the cost of heating their home or the cost of sending a daughter or son to college. Economists, however, are more apt to talk about the prices of these items and consider how households allocate a finite income to meet family needs. When economists con-sider costs, they refer most often to the production deci-sions of firms—what and how much they decide to produce, how they produce it, and how much it costs. The usual free-market assumption of profit-maximizing behav-ior by firms is not necessary for this discussion. All firms, from small local nonprofits, such as community libraries, to large international corporations attempt to operate effi-ciently. That is, they strive to produce the most output at the lowest possible cost. The purpose of this chapter is to consider the produc-tion decisions and associated costs that firms face. It should be clear at the outset that this discussion will be incomplete in that it will not consider the profitability of a firm or the particular market in which it operates. A firm may produce a safe, reliable product at minimum cost, using the best technology, but fail if there is insuffi-cient demand for its product. Similarly, an inefficient, lumbering, pollution-generating company may make sig-nificant profits if it dominates its industry and has a loyal following of customers. This is not meant to be seen as an endorsement of any particular industry structure. Rather, it is to point out that the costs and production decisions that firms make address only part of the economic sur-vival equation. One must also consider the demand for the firm's product and the market in which it operates.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
These are the ones who determine the real relationships between inputs and outputs. The laws describe the technically possible ways of increasing the level of production. In the short-run, the cost function ( C ) may be written simplistically as a function of the quantity of output ( Q ) as: C = f ( Q ) TRADITIONAL COST THEORY – THE SHORT-RUN 6.1 where output is a function of labour ( L ) for all other factors (subsumed under capital ( K )) being fixed, expressed as the short-run production function: Q = f ( L ) K 1 Thus the cost function is dependent on the production function. This gives the cost curve its shape while other factors shift the cost curve. 6.1.1 Short-run total costs The short-run total costs ( TC ) are the sum of the total fixed costs ( TFC ) and the total variable costs ( TVC ). This is expressed as: TC = TFC + TVC The fixed costs are usually those that do not vary directly on a day-to-day basis with the daily output of the production plant. These are the overhead expenses that are incurred whether or not production takes place on any given day. The typical fixed costs, often subsumed under capital ( K ), include: • Building depreciation and repair costs and land maintenance costs • Costs for depreciation (wear and tear) of machinery and equipment • Remuneration of salaried employees and senior administrative staff (those with annual salaries) • Lump-sum to cover normal profit (opportunity cost), risk and any lump-sum taxes. The variable costs are the day-to-day operation expenses and vary with the quantity produced. These costs include: • Wages of labour (weekly, daily, hourly payments) • Operational expenses directly related to levels of output (energy costs, utilities, ongoing maintenance) • Raw material and intermediate goods inputs Short-run total fixed cost (TFC) Since the total fixed cost ( TFC ) is a constant, it is graphed as a straight line parallel to the X -axis.
eBook - ePubMedia Economics
Applying Economics to New and Traditional Media
- Colin Hoskins, Stuart McFadyen, Adam Finn(Authors)
- 2004(Publication Date)
- SAGE Publications, Inc(Publisher)
economically efficient ; there must be no other method available that is capable of producing the output for a smaller total value (cost) of inputs. Total cost depends on the number of each factor employed and the price per unit that the firm has to pay.5.1 Short Run, Long Run, and Very Long RunProduction opportunities—ways of combining inputs to change output—differ according to the length of time considered. The quantities of some inputs can be changed very rapidly, whereas a considerable time is needed to change others. For example, energy use can be changed by the turn of a switch, whereas building a plant or installing machinery is likely to take months or even years.The short run is defined as a time period insufficient to change the input level of items such as capital equipment and plant. Such capacity factors are fixed in the short run. However, quantities of inputs such as labor and raw materials can be changed and are thus variable factors even in the short run.The long run is a period of sufficient length that all factors of production are variable, but the basic technology of production is given.The very long run is a period during which the technological possibilities available to the firm may also change.5.2 Production in the Short RunA production function shows the maximum quantity of a product that can be produced in a time period for each set of alternative inputs. In the short run, the production function is governed by the Law of Diminishing Returns . This law states that after a certain level of input of the variable factor, each additional unit of the variable factor, employed in conjunction with a fixed quantity of another factor, adds less to total product than the previous unit. (In production theory, economists use the word “product” to mean “output”; the words are used interchangeably).The law is stated as if there were only two factors, one variable and the other fixed, but this is a simplification; the law applies for any number of variable and fixed factors. Also, note the similarity between the Law of Diminishing Returns and the Law of Diminishing Marginal Utility.
eBook - PDFManagerial Economics
Problem-Solving in a Digital World
- Nick Wilkinson(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
It may be easier to increase it, but even here job searches can take time, especially for top positions. 6.3.3 The Short Run This is, again, a term that has a different interpretation in economics from other aspects of business, including finance. In finance the ‘short run’ or ‘short term’ refers to a period of a year or less. In economics this is not such a useful definition, because it does not permit so many generalizations, bearing in mind the large differences between firms in terms of their business environments. It is therefore more useful to define the short run as being the period during which at least one factor input is fixed while other inputs are variable. In practice, this will vary from firm to firm and industry to industry according to the circumstances. It also means that a firm might have several short-run time frames as more and more factors become variable. This tends to be ignored in analysis, since the same general principles apply to any short-run situation, as long as at least one factor is fixed. Sometimes economists refer to a ‘very short run’, defined as being the period during which all factors are fixed. Obviously, 6.3 Production Functions 279 output cannot be varied under such circumstances, but different amounts can be supplied onto the market depending on inventory levels. 6.3.4 The Long Run This is the converse of the short run, meaning that it is the period during which all factors are variable. One can now see that all the last four definitions are interdepend- ent. It may seem initially that this circularity is a problem and is not getting us anywhere, but we will see that the definitions given permit some very useful analysis. Some economists also refer to a ‘very long run’, which they define as being the period during which technology can also change.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
This theory explains the behaviour of these costs both in the short run and long run production programmes. i. Traditional Theory - Short Run Costs They include both Absolute costs and Per unit costs. a. Traditional Theory - Short Run Absolute Costs They include TFC, SRTVC and SRTC. TFC: It is the cost incurred by the farmer in the production programme irrespective of the level of output. That means, whatever may be the level of output or even at zero output level, TFC remains same. So, when there is zero production, SRTC is equal to TFC. These fixed costs are the costs related to fixed resources only. The distinction between fixed costs and variable costs will arise only in short run because, in the long run, all the resources are variable and hence, all costs are variable costs in the long run. But, the recovery of the fixed costs is considered important in the long run and not in the short run. Hence, fixed costs are also called as long run costs. To an economist, the fixed costs are Overhead costs and to an Accountant, they are Indirect costs. Firms have no control This ebook is exclusively for this university only. Cannot be resold/distributed. over fixed costs in the short run. For this reason, fixed costs are sometimes called as Sunk costs. They are also called as Oncosts or Supplementary costs. TFC curve is a straight line parallel to X-axis because, irrespective of the level of output, TFC remains same ( Figure 5.2 ). But, when the output goes up, the fixed cost per unit of output comes down, as the TFC is then divided between larger number of units of output. Examples include, depreciation, interest on loan amount, land revenue etc. SRTVC: As the name indicates, this cost varies with the level of output. So, when output is zero, variable cost is also zero and when output increases, variable cost also increases. These costs are related to variable resources only and they increase, but not necessarily in the same proportion as the increase in output.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 7 Production and Cost in the Firm 153 7-4 Costs in the Long Run So far, the analysis has focused on how costs vary as the rate of output increases in the short run for a firm of a given size. In the long run, all inputs that are under the firm’s control can be varied, so there is no fixed cost. The long run is not just a succession of short runs. The long run is best thought of as a planning horizon . In the long run, the choice of input combinations is flexible. But once the size of the plant has been selected and the concrete has been poured, the firm has fixed costs and is operating in the short run. Firms plan for the long run, but they produce in the short run. We turn now to long-run costs. 7-4a Economies of Scale Recall that the shape of the short-run average total cost curve is determined primarily by increasing and diminishing marginal returns from the variable resource. A differ-ent principle shapes the long-run cost curve. If a firm experiences economies of scale , long-run average cost falls as the scale of the firm expands. Consider some sources of economies of scale. A larger firm size often allows for larger, more specialized machines and greater specialization of labor. For example, compare the household-size kitchen of a small restaurant with the kitchen at a McDonald’s. At low rates of output, the smaller kitchen produces meals at a lower average cost than does McDonald’s. But if produc-tion in the smaller kitchen increases beyond, say, 100 meals per day, a kitchen on the scale of McDonald’s would make meals at a lower average cost.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 7 Production and Cost in the Firm 153 7-4 Costs in the Long Run So far, the analysis has focused on how costs vary as the rate of output increases in the short run for a firm of a given size. In the long run, all inputs that are under the firm’s control can be varied, so there is no fixed cost. The long run is not just a succession of short runs. The long run is best thought of as a planning horizon. In the long run, the choice of input combinations is flexible. But once the size of the plant has been selected and the concrete has been poured, the firm has fixed costs and is operating in the short run. Firms plan for the long run, but they produce in the short run. We turn now to long-run costs. 7-4a Economies of Scale Recall that the shape of the short-run average total cost curve is determined primarily by increasing and diminishing marginal returns from the variable resource. A differ- ent principle shapes the long-run cost curve. If a firm experiences economies of scale, long-run average cost falls as the scale of the firm expands. Consider some sources of economies of scale. A larger firm size often allows for larger, more specialized machines and greater specialization of labor. For example, compare the household-size kitchen of a small restaurant with the kitchen at a McDonald’s. At low rates of output, the smaller kitchen produces meals at a lower average cost than does McDonald’s. But if produc- tion in the smaller kitchen increases beyond, say, 100 meals per day, a kitchen on the scale of McDonald’s would make meals at a lower average cost.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Every firm can gain insight into its task of earning profits by dividing its total costs into fixed and variable costs, and then using these calculations as a basis for average total cost, average variable cost, and marginal cost. However, making a final decision about the profit-maximizing quantity to produce and the price to charge will require combining these perspectives on cost with an analysis of sales and revenue, which in turn requires looking at the market structure in which the firm finds itself. Before we turn to the analysis of market structure in other chapters, we will analyze the firm’s cost structure from a long-run perspective. 7.4 | Production in the Long Run By the end of this section, you will be able to: • Understand how long run production differs from short run production. In the long run, all factors (including capital) are variable, so our production function is Q = f ⎡ ⎣L, K ⎤ ⎦ . Consider a secretarial firm that does typing for hire using typists for labor and personal computers for capital. To start, the firm has just enough business for one typist and one PC to keep busy for a day. Say that’s five documents. Now suppose the firm receives a rush order from a good customer for 10 documents tomorrow. Ideally, the firm would like to use two typists and two PCs to produce twice their normal output of five documents. However, in the short turn, the firm has fixed capital, i.e. only one PC. The table below shows the situation: Chapter 7 | Production, Costs, and Industry Structure 169 # Typists (L) 1 2 3 4 5 6 Letters/hr (TP) 5 7 8 8 8 8 For K = 1PC MP 5 2 1 0 0 0 Table 7.11 Short Run Production Function for Typing In the short run, the only variable factor is labor so the only way the firm can produce more output is by hiring additional workers. What could the second worker do? What can they contribute to the firm? Perhaps they can answer the phone, which is a major impediment to completing the typing assignment.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Still other firms may find that diminishing marginal returns set in quite sharply. If a manufacturing plant tried to run 24 hours a day, seven days a week, little time remains for routine equipment maintenance, and marginal costs can increase dramatically as the firm struggles to repair and replace overworked equipment. Every firm can gain insight into its task of earning profits by dividing its total costs into fixed and variable costs, and then using these calculations as a basis for average total cost, average variable cost, and marginal cost. However, making a final decision about the profit-maximizing quantity to produce and the price to charge will require combining these perspectives on cost with an analysis of sales and revenue, which in turn requires looking at the market structure in which the firm finds itself. Before we turn to the analysis of market structure in other chapters, we will analyze the firm’s cost structure from a long-run perspective. 7.4 | Production in the Long Run By the end of this section, you will be able to: • Understand how long run production differs from short run production. In the long run, all factors (including capital) are variable, so our production function is Q = f ⎡ ⎣L, K ⎤ ⎦ . Consider a secretarial firm that does typing for hire using typists for labor and personal computers for capital. To start, the firm has just enough business for one typist and one PC to keep busy for a day. Say that’s five documents. Now suppose the firm receives a rush order from a good customer for 10 documents tomorrow. Ideally, the firm would like to use two typists and two PCs to produce twice their normal output of five documents. However, in the short turn, the firm has fixed capital, i.e. only one PC. The table below shows the situation: Chapter 7 | Production, Costs, and Industry Structure 171
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