Answer to Question #62776 in Economics of Enterprise for Aman Solanki

Question

explain the nature of short turn cost curve and explain short turn cost of traditional theory of cost

Answer 1

'Short Run' is the time period in which if a firm wishes to increase its output it can do so by changing only certain variable inputs or factors of production like Labor, Raw material etc. while certain other inputs or factors of production like Capital.
Short run is the time period during which if a firm wishes to increase its output then it can do so only by changing the variable factors (like Labor). Other factors (like Capital) remain fixed in the short run or in other words cannot be varied on account of time limitation applicable on the company.
Short run costs are accumulated in real time throughout the production process. Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production. The short run costs increase or decrease based on variable cost as well as the rate of production. If a firm manages its short run costs well over time, it will be more likely to succeed in reaching the desired long run costs and goals.
The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run. In the long run the general price level, contractual wages, and expectations adjust fully to the state of the economy. In the short run these variables do not always adjust due to the condensed time period. In order to be successful a firm must set realistic long run cost expectations. How the short run costs are handled determines whether the firm will meet its future production and financial goals.