A Business Encyclopedia

Short-run Cost

Definition: The Short-run Cost is the cost which has short-term implications in the production process, i.e. these are used over a short range of output. These are the cost incurred once and cannot be used again and again, such as payment of wages, cost of raw materials, etc.

In a short-run, at least one factor of production is fixed while the other remains variable. Therefore, in the short-run, the level of output can be increased only by increasing the variable factors such as labor, raw materials while the other factors such as capital, plant size, remains unchanged. The short-run cost includes both the fixed cost (that do not change with the change in the level of output) and variable cost (that varies with the variations in the level of output). Some factors remain fixed due to the time constraints imposed on a company.

For example, Suppose a company observes a sudden surge in the demand for its goods and in order to meet the increased demand in the short-run, it can increase its level of output only by varying the variable factors. Such as, the company can employ more labor or purchase the raw material in bulk, but however, the plant size or the machinery cannot be altered to enhance the production capacity of the firm. Thus, all the cost incurred on the variable factors such as labor and raw material constitutes the short-run cost.

From an analytical point of view, the short run costs vary with the change in the total output, but however, the size of the firm remains the same. Thus, the short-run cost is treated as a variable cost.

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