Economics Short Run Vs Long Run Costs Questions Medium
Total costs refer to the overall expenses incurred by a firm in the production process. These costs can be divided into two components: fixed costs and variable costs.
In the short-run, fixed costs are those expenses that do not change regardless of the level of production. These costs include rent, insurance, and salaries of permanent employees. Fixed costs are considered to be sunk costs as they cannot be easily adjusted in the short-run.
Variable costs, on the other hand, are expenses that vary with the level of production. These costs include raw materials, labor, and utilities. Variable costs increase as production increases and decrease as production decreases.
In the long-run, both fixed costs and variable costs can be adjusted. Firms have the flexibility to change their production capacity, such as expanding or reducing the size of their facilities. This means that in the long-run, all costs become variable costs.
It is important to note that the distinction between fixed and variable costs is based on the time horizon under consideration. Costs that are fixed in the short-run may become variable in the long-run as firms have more flexibility to adjust their operations.