Question

Explain the factors that affect the firm's total cost, and explain the behaviour of a typical firms costs in the short run and long run. In addition, what determines the behaviour of a typical firm's costs in the short run and long run.

Answer 1

The factors that affect the firm's total cost are rate of output,size of the plant , prices of inputs,Technology, efficiency of managenment , size of production etc, The rate of output affects toatl cost as marginal cost increases as output increases above a level.Technological changes increases productivity and leads to fall in average cost.Input prices and higher wages affect the total cost of production.If production is on a large scale , cost of production falls.

Cost includes all the direct and indirect cost incurred by a firm to produce a product.Short run cost are incurred in the priduction process.Fixed cost and variable cost affect short run cost.However the production process is affected only by the variable cost and revenue. Along with output produced variable cost changes.Wages of employees and cost of raw materials are egs of variable cost.Long run costs are incurred when firm changes production level. In the long run there are no fixed factors of production.In the long run procers only plan and implemment their planning.Changing the quantity of production,expanding the company etc are long run decisions  that affect the cost of the firm. When a firm produces the quantity of goods at the lowest cost,efficient long run costs are sustained.So the main difference between short and long run cost is that there are no fixed factors in the long run but there are fixed and variable factors in the short run.

Behaviour of a firm's cost is determined by a number of factors like volume, price, efficiency,sales mix and production changes .