Economics Short Run Vs Long Run Costs Questions
Short-run costs directly impact a firm's profitability by affecting its ability to generate profits in the short term. These costs include expenses such as labor, raw materials, and overhead costs that are necessary for the firm's day-to-day operations. If short-run costs increase, the firm's profitability may decrease as it has to allocate more resources to cover these expenses, potentially reducing its profit margins. Conversely, if short-run costs decrease, the firm's profitability may increase as it can generate higher profits with lower expenses. Therefore, managing and controlling short-run costs is crucial for a firm to maintain or improve its profitability.