What is the difference between short run and long run costs of production?

Short run costs of production involve at least one fixed factor, while long run costs have all factors as variable.

In more detail, the short run in economics is a period where at least one factor of production is fixed. This is usually capital, such as machinery or buildings, which cannot be changed or adjusted quickly. Therefore, in the short run, a firm can only adjust its output by changing the variable factors, such as labour or raw materials. This leads to the concept of short run costs, which include fixed costs that do not change with the level of output, and variable costs that do change with output.

For example, if a bakery wants to produce more bread in the short run, it cannot quickly build a new oven (a fixed cost), but it can hire more bakers or buy more flour (variable costs). Therefore, in the short run, the bakery’s costs will be a combination of fixed costs (the oven) and variable costs (the bakers and flour).

On the other hand, the long run is a period where all factors of production can be varied. There are no fixed inputs in the long run, as firms have enough time to adjust all aspects of their production process. This leads to the concept of long run costs, which are all variable. In the long run, firms can adjust their scale of production to achieve the most efficient level of output.

Continuing with the bakery example, in the long run, the bakery could build more ovens to increase its output. Therefore, in the long run, all of the bakery’s costs (the ovens, the bakers, and the flour) are variable.

In summary, the key difference between short run and long run costs of production is that short run costs include both fixed and variable costs, while long run costs are all variable because all factors of production can be adjusted.