TFC | TVC | TC | AFC | AVC | SAC | SMC
What is Short Run and Long Run for a Firm?
In the previous session we discussed about Short Run and Long Run for a firm in context of time period. Short Run for a firm is a time period in which at least one or few of the factors of production cannot be varied by the firm that is to say, they remain fixed or constant. Firm cannot change or alter its quantity in use in the short run. The factors of production which remains fixed or constant are known as Fixed Factors. The remaining factors of production which can be varied or altered are known as Variable Factors.
The Long Run for a firm is a time period in which all factors of production can be varied or altered by the firm. So to say all the factors of production becomes Variable Factors for a firm in the long run. And hence there are no fixed factors for the firm in the long run. So in the long run, the firm can produce the desired level of output by simultaneously vary all factors of production or inputs.
It is important to note here that the segregation between short run and long run as a time period for a firm cannot be defined in terms of days, months or years. Different types of firms have distinct production processes based on the sector and industry in which they are operating. The Short Run and Long Run is defined as per the variability of the factors of production for a firm. For a firm, a time period in which the firm is able to vary all the factors used. Is termed as Long Run and any period less than the same will be Short Run for that firm. Hence for different firms the short run and long run period may differ.
Short Run Costs
What is Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC)?
We know that the Short Run for a firm is a time period in which there will at least few factors of production or inputs which remains fixed or constant i.e., they cannot be varied. The cost incurred by the firm to employ these fixed factors of production or inputs is called the Total Fixed Cost (TFC). The Total Fixed Cost (TFC) remains fixed or constant for a firm indifferent of the level of output produced.
So to say, the Total Fixed Cost (TFC) has no relation with the level of output in the short run as even if the level of output would be zero, the firm will be bound to incur Total Fixed Cost (TFC). So now in order to produce any desired level of output, the firm can adjust only the variable factors of production in the short run. The cost incurred by the firm to employ these variable factors of production or inputs is called the Total Variable Cost (TVC).
Here in the above table, the first column shows the output level in terms of units. The second column shows the Total Fixed Cost (TFC) which remains fixed independent of the level of output. Even if the output is zero, the Total Fixed Cost (TFC) remains the same. The third column shows the Total Variable Cost (TVC) which increases as the total output increases. When the output is zero, the Total Variable Cost (TVC) will be zero. As the level of output increases, the Total Variable Cost (TVC) also increases. The fourth column shows the Total Cost (TC) which is the sum of second column i.e., Total Fixed Cost (TFC) and third column Total Variable Cost (TVC).
As when the output is zero, the Total Variable Cost (TVC) remains zero and hence the Total Cost (TC) will be equal to the Total Fixed Cost (TVC). And moving forward, the Total Cost (TC) will simply be the addition of TFC and TVC.
Average Fixed Cost (AFC)
The Fixed Cost per unit of output incurred by the firm is termed as the Average Fixed Cost (AFC). The AFC can be calculated as
When the level of output is zero, the AFC and AVC are undefined.
Short Run Average Cost (SAC)
The change in Total Cost per unit of change in output is termed as the Short Run Marginal Cost (SMC). The SMC can be calculated as
In the above table, SMC is shown in the last column. SMC for 2 unit of output is calculated as (76 – 60) i.e., Change in Total Cost divided by (2 – 1) i.e., Change in Output which gives SMC = 16.
Short Run Marginal Cost is to undefined at zero output.
Important Note
In the short run the fixed cost cannot be changed. So whatever change in total cost (TC) takes place is attributable to the change in the Total Variable Cost (TVC).
Thus in the short run, the Marginal Cost is the increase in Variable Cost due to the increase in production of 1 unit of output.
In this session we discussed in detail the concepts of Short Run Costs. We discussed the classification of Short Run and Long Run for a firm. We then moved on to discuss several types of costs which are Total Fixed Cost (TFC), Total Variable Cost (TVC), Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Short Run Average Cost (SAC) and Short Run Marginal Cost (SMC).
The Long Run for a firm is a time period in which all factors of production can be varied or altered by the firm. So to say all the factors of production becomes Variable Factors for a firm in the long run. And hence there are no fixed factors for the firm in the long run. So in the long run, the firm can produce the desired level of output by simultaneously vary all factors of production or inputs.
It is important to note here that the segregation between short run and long run as a time period for a firm cannot be defined in terms of days, months or years. Different types of firms have distinct production processes based on the sector and industry in which they are operating. The Short Run and Long Run is defined as per the variability of the factors of production for a firm. For a firm, a time period in which the firm is able to vary all the factors used. Is termed as Long Run and any period less than the same will be Short Run for that firm. Hence for different firms the short run and long run period may differ.
Short Run Costs
What is Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC)?
We know that the Short Run for a firm is a time period in which there will at least few factors of production or inputs which remains fixed or constant i.e., they cannot be varied. The cost incurred by the firm to employ these fixed factors of production or inputs is called the Total Fixed Cost (TFC). The Total Fixed Cost (TFC) remains fixed or constant for a firm indifferent of the level of output produced.
So to say, the Total Fixed Cost (TFC) has no relation with the level of output in the short run as even if the level of output would be zero, the firm will be bound to incur Total Fixed Cost (TFC). So now in order to produce any desired level of output, the firm can adjust only the variable factors of production in the short run. The cost incurred by the firm to employ these variable factors of production or inputs is called the Total Variable Cost (TVC).
The cost we get by adding the Total Fixed Cost (TFC) and Total Variable Cost (TVC) is called Total Cost (TC) for a firm. So to say, formulating the above we get
So in the short run, the fixed factors have no impact on the level of output or production. So in order to increase the level of output or production, the firm will need to employ more of the variable factors or inputs. Thus in the short run, out of Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC), only Total Variable Cost and Total Cost changes. So to say, as the output increases, the Total Variable Cost and Total Cost will also increase.
Here in the above table, the first column shows the output level in terms of units. The second column shows the Total Fixed Cost (TFC) which remains fixed independent of the level of output. Even if the output is zero, the Total Fixed Cost (TFC) remains the same. The third column shows the Total Variable Cost (TVC) which increases as the total output increases. When the output is zero, the Total Variable Cost (TVC) will be zero. As the level of output increases, the Total Variable Cost (TVC) also increases. The fourth column shows the Total Cost (TC) which is the sum of second column i.e., Total Fixed Cost (TFC) and third column Total Variable Cost (TVC).
As when the output is zero, the Total Variable Cost (TVC) remains zero and hence the Total Cost (TC) will be equal to the Total Fixed Cost (TVC). And moving forward, the Total Cost (TC) will simply be the addition of TFC and TVC.
Average Fixed Cost (AFC)
The Fixed Cost per unit of output incurred by the firm is termed as the Average Fixed Cost (AFC). The AFC can be calculated as
Average Variable Cost (AVC)
Average Variable Cost (AVC)
The Fixed Cost per unit of output incurred by the firm is termed as the Average Fixed Cost (AFC). The AFC can be calculated as
Short Run Average Cost (SAC)
The Total Cost per unit of output incurred by the firm is termed as the Short Run Average Cost (SAC). The SAC can be calculated as
In the above table, the SAC as shown in the seventh column, is derived by dividing the first column (Total Cost) by the first column (Output).
The SAC can also be calculated by adding the Average Fixed Cost (AFC) with Average Variable Cost (AVC). So SAC can also be calculated as
For output of unit 1, we get the SAC by adding AFC- 40 with AVC- 20 equals to SAC-60.
Short Run Marginal Cost (SMC)
Short Run Marginal Cost (SMC)
The change in Total Cost per unit of change in output is termed as the Short Run Marginal Cost (SMC). The SMC can be calculated as
Short Run Marginal Cost is to undefined at zero output.
Important Note
In the short run the fixed cost cannot be changed. So whatever change in total cost (TC) takes place is attributable to the change in the Total Variable Cost (TVC).
Thus in the short run, the Marginal Cost is the increase in Variable Cost due to the increase in production of 1 unit of output.
As in the short run, the entire Marginal Cost is contributed by the Total Variable Cost (TVC), for any level of output, the sum of the Marginal Cost up to that level of output equals the Total Variable Cost (TVC) at that level.
Conclusion
Conclusion
In this session we discussed in detail the concepts of Short Run Costs. We discussed the classification of Short Run and Long Run for a firm. We then moved on to discuss several types of costs which are Total Fixed Cost (TFC), Total Variable Cost (TVC), Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Short Run Average Cost (SAC) and Short Run Marginal Cost (SMC).
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