Costs of Production: Short Run and Long Run

The costs a firm faces determine its supply decisions, its profitability, and ultimately whether it survives. Economists distinguish carefully between short-run and long-run costs, because the behaviour of costs differs fundamentally depending on whether all factors of production can be varied. This lesson examines cost concepts, the law of diminishing returns, and the key cost curves that appear throughout microeconomics.

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The Short Run and the Long Run

In economics, the distinction between the short run and the long run is not based on calendar time but on the flexibility of factors of production:

Time Period	Definition	Example
Short run	At least one factor of production is fixed (typically capital — factories, machinery, land)	A bakery cannot build a new oven overnight
Long run	All factors of production are variable — the firm can change the scale of its entire operation	The bakery can relocate to larger premises, buy more ovens, hire more staff
Very long run	The state of technology changes	New baking technology is invented that transforms production