This document discusses and compares short run and long run cost functions. In the short run, average total costs and average variable costs are U-shaped, and marginal cost intersects them at their lowest point from below. In the long run, firms can adjust all factors of production, and long run average cost forms an envelope of the short run cost functions. The key difference is that short run cost functions impact input quantity decisions in the short term, while long run cost functions influence expansion decisions.

1. Short run cost functions
Short run cost functions help in determining the
relationship between output and costs in the
short run .
The short run average total costs(SRATC) and
average variable costs are slightly U shaped.
The marginal cost(MC) curve intersects both
the average variable cost curve and short run
average total cost curve at their lowest point
and from below.

2. Long run cost functions
• Long run can be defined as a sufficiently long
period that allows the firm to adjust factors of
production to meet market demand. In the long
run , the firm chooses the combination of inputs
that minimizes the cost of production at a
desired level of output. The firm identifies the
plant size , types and sizes of equipment , labour
skills and raw material that on combination give
the maximum output at lowest cost considering
the technology available and production
methods used.

3. The long-run cost curves
The long run average
cost curve formed is like
an envelope on which all
short run cost functions
are formed. Long run
average cost of
producing at any level of
output does not occur at
the point where short run
average costs are
minimum.

4. Comparison between long run and
short run
• The long run cost function has important
implications while taking decisions for the
expansion of scale of operations : while
the short run cost function has a major
impact on decisions about the quantities of
inputs that are employed in the production
process at a given point of time.

6. Short run cost functions
Short run cost functions help in determining the
relationship between output and costs in the
short run .
The short run average total costs(SRATC) and
average variable costs are slightly U shaped.
The marginal cost(MC) curve intersects both
the average variable cost curve and short run
average total cost curve at their lowest point
and from below.

7. The short run cost curve
MC SRATC
AVC
C
O
S
T
S
QUANTITY
MINIMU
M atc

8. The short run cost curve
MC SRATC
AVC
C
O
S
T
S
QUANTITY
MINIMU
M atc