Horti-Business Management

B. Costs based on time

Short run costs

• Since Short run is a period wherein at least some inputs are fixed, short run costs include both fixed and variable costs.
• Theory of short-run cost curves says AVC, ATC and MC are U-shaped which reflects the law of variable proportion. In short run these curves fall initially showing the increasing return of the variable factor. Then it reaches minimum showing optimum return to the variable factor and then increases showing decreasing return to the variable factors.
• The MC curve above AVC is referred to as the individual farmer’s short –run supply curve for output. It shows different output levels that the individual farmer should be willing to produce at various level of price. The horizontal summation of the MC curves of individual farmers will give short –run supply curve for each individual commodity. It is called Market supply curve.


Long – run cost curve

• All costs are variable in the long run. So there is no differentiation between AVC, AFC, and ATC as in the Short Run. In the Long run there is only LRAC because in the LR all factors are variable. It is also called as Planning curve, Envelope curve, or scale curve, each point in LRAC corresponds to a point in short-run cost curve.
• LRAC is U shaped. The point corresponding to the output M is called Optimum plant size. The expansion of output from 0 to M results in reduction in cost per unit. In other words in this region the firm experiences economies of scale or increasing returns.
• At point M, LRAC reaches minimum and it is optimal level of production. The region beyond M. the firm will face increasing costs due to complexities in management. In other words this region corresponds to decreasing returns or Diseconomies of scale.