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Short Run Costs

In analyzing factor cost in an environment, accountants and economists speak much the same language. This is become, in a competitive market, price of foods offered for sale tend to be based on the highest return obtainable by using them. That is to say, market price and opportunity cost come closer together; in fact, if the market is truly competitive, it is likely that they will be identical. However, an account thinks of a cost as allocated expense which must be reimbursed while an economist thinks of cost as some kind of sacrifice for bringing out intended conversion of inputs into output.

The total cost of any output is the value of all the inputs used in its production. Cost, therefore, will rise or fall as the ratio of outputs to inputs changes. Such changes may come about as a result of changes in the efficiency of the conversion process or changes in the prices of the inputs.

Average cost is the cost per unit of output needed to prevent the use of input in alternative uses. This ‘resistance’ is sometimes measured by the price of the factor used. When we are deciding upon proper allocation of more than one input, the resistance is generally measured in terms of the usefulness or marginal productivity of the resource in each use.

In the short run, just as the total costs are the aggregate of total fixed and variable costs, the average costs are also the aggregate of average fixed costs and average variable costs.

Marginal costs refer to change in cost, obviously in variable part of the cost. As the total variable costs vary with the level of output produced, the marginal costs vary with the level of output produced, the marginal costs change. The marginal costs represent the cost of producing an addition level of output.