Short – run versus Long-run Costs
It is possible to distinguish between the behavior pattern of costs in the short-run and in the long-run. The distinction between short-run and long-run cost behavior is a basic one in economic theory and is based upon the degree of adaptation of all input factors to rate and type of output. When there is perfect flexibility in the size of plant, labour force, executive talent, and so forth then in the size of plant, labour force, executive talent, and so forth then the long-run cost behavior is involved. Anything short of perfect flexibility produces cost behavior that can be changed and improved, given time and investment resources. Such alterable costs appear in short-run during which some costs are variable and some fixed.
Most business decisions involve some degree of short-run imbalance in the sense that some factors are fixed. The short-run reduction of unit cost that comes from higher utilization of existing plant by spreading overhead over more output is often confused with saving of higher size of plant. Such cost reduction in the long-run results from adjustments in the scale of plant, size of firm, and structure of industry.
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