Distinction between short run costs and long run costs

(i)    Short run costs — Since in the short run (or period), some factors are fixed (like machinery, building, technical labour which cannot be changed due to insufficiency of time) and some are variable (like raw material, ordinary labour, power etc. which can be changed), therefore, the associated costs are either fixed costs or variable costs. Thus short run costs refer to the costs incurred by a firm during short period. Although main short run costs consist of Fixed Cost (FC) and Variable Cost (VC) but with their offshoots, different types of short run costs are : TVC, TFC, TC, SAC (Short run average cost), AFC, AVC and SMC (short run marginal cost). Here S stands for short run.

(ii)    Long run costs — Since in the long run all the factors are variable and there is no distinction between variable factors and fixed factors, so there is no distinction between fixed costs and variable costs. All costs are variable. Therefore there is no distinction between total cost and total variable cost; between ATC and AVC. We simply use the term long run average cost denoted by LAC. Similarly we use the term LMC for marginal cost. Therefore generally two kinds of costs namely LAC (long run average costs) and LMC (long run marginal costs) are discussed. Following implications of long run costs are noteworthy.

(i)    Distinction between total cost and total variable cost disappears. Simply the term total cost is used.

(ii)    There are no TFC and AFC curves because fixed costs do not exist.

(iii)    There is no distinction between average total costs and average variable costs because of absence of fixed costs. Instead only the term 'Long run Average Cost' (LAC) is used.

(iv)    Marginal cost is denoted by 'Long run Marginal Cost' (LMC).