Department of Economics
Thayer Watkins
Silicon Valley

Long Run versus Short Run Cost Functions

The terminology of long run and short run is another case in which the technical meaning is quite different from what would be expected on the basis of the linguistics of the terms. Although the terms long run and short run would seem to have to do with a period of time that is not the case. The short run cost function for a particular factory is the relationship between cost and output; i.e., the cost that is incurred in producing various levels of output. Different factories will, in general, have different short run cost functions. For example, in the graph below there are four short run cost functions shown. Note that at some levels of output the cost function for one factory is lower and at other levels of output the cost function for that factory may be higher.

If a company were producing at the same level of output for an extended period of time it would be able to choose the factory used to produce that level of output. Even if it did not start out with that type of factory to begin with it would, when its original factory and its equipment wore out, replace it with the ideal factory for producing a specific level of output. In the graph below the lowest cost at each level of output is shown in violet. This violet function is the long run cost function.

If the short run cost function are taken out of the graph then what is left is the long run cost function.

Below the graph shows the average total cost curves for the case considered previously.

HOME PAGE of Thayer Watkins