Question

In performing industry analysis which is more relevant to analyze, the short run cost or the long run cost. Expound

Answer 1

First we understand short run and long run cost their nature in the economy.

Short run cost refers to a cost in which type type of costs are involved the fixed cost and the variable cost. Fixed cost is the cost which use in the set up for the business and fixed cost if fixed in nature it never changes in the short run period for example land, plant and machinery. The variable cost is the cost which can be changed in the short period of time. For example ratio of labor and capital in the production process.

Long run cost refers to the cost where there is no fixed and variable cost. In long run all the costs are variable or changeable in nature. The long run cost is may be equal to or less than short run cost but not more than that.

To industry analysis the long run cost is more relevant to analyze. Because as we discuss above in long run there is no fixed cost and all costs are variable in nature. It helps the firm owner to change the level of output by using all method. But in short run we have only able to change the labour and capital ratio. So we can say that there is no restriction on the firm in the long run. The other thing is that in short run we cannot analyse the firm because the time period is too small as compare to long run.