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Costs of production in the short run

Economic and accounting costs

Accounting costs are the costs most often associated with the costs of producing. Economic costs are not only the costs of producing a good, it also includes the opportunities forgone by producing this product.
Example: If a firm is producing Computers then the accounting costs are the costs incurred for producing the computers. Economic costs include the cost of producing the computers as well as opportunity cost. Suppose, If this firm could lease its office and the plant for say $100,000 then that is the opportunity cost.

Short run and Long run

Short run in this microeconomic context is a planning period over which a firm must consider one or more of their factors of production as fixed in quantity.

For example, a factory may regard its building as a fixed factor over a period of at least the next year. It would take at least that much time to find a new building or to expand or reduce the size of its present facility. Decisions concerning the operation of the factory during the next year must assume the building will remain unchanged. Other factors of production such as factory labour, machinery etc could be changed during the year, but the size of the factory building must be regarded as a constant.

The planning period over which a firm can consider all factors of production as variable is called the long run.

In the long run, firm may contemplate alternatives such as modifying the building or building a new facility.

 

Total cost

It is composed of all the fixed cost and variable cost put together.

TC= VC+FC

Marginal Cost

It is the cost of production for adding one extra unit of output. Marginal costs are variable costs consisting of labour and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses).

Average Cost

It is the Total cost of production divided by total output.

AC=TC/output

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