Question

Which costs need to be covered in the short run and why?

Answer 1

Which Costs needs to be recovered in short run?

Well, let us start the discussion by economists’ classification of cost. Economists classify cost based on their behaviour and behaviour wise costs can be classified broadly into two categories, Variable Cost and Fixed Cost. Fixed costs are those which needs to be incurred irrespective of the volume of the production and Variable costs are those which are directly related with the volume of production and varies proportionately according to the level of output.

At any point of time total cost to the producer is equals to the sum of Fixed cost and Variable cost. To generate profit the operator or the producer needs to recover both the fixed and variable cost but in certain cases the producer will continue to operate if he or she can recover only the variable costs. Yes, in short run the producer concentrates on recovering the variable costs only, because even if he or she is unable to recover the fixed cost in short run they would have make a profit in long run. Fixed costs are some expenses which the producer is already committed to pay, even if there is no output. If the producer shuts down the operation when he or she face such a situation that they could only be able to recover the variable cost then it will cost them more because they are already committed to the fixed costs. So, in short run the producers will be continuing operation if they can recover only the variable cost.

From the above discussion it is very much clear that the variable cost is the key decision making criteria in short run.

*Please feel free to ask me if any more discussion is needed in this topic.

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