Introduction:

In economics, the cost of production is a crucial determinant in any firm's decision-making process. The concept of short run and long run costs helps us understand how costs vary over different time horizons. Short run costs refer to the costs that can be adjusted in the short term, such as labor and raw materials, while long run costs include all costs that can be adjusted in the long term, such as plant size and capacity.

Understanding short run costs:

In the short run, a firm is constrained by certain factors that cannot be easily altered, such as the size of the production facility or the availability of specialized equipment. Consequently, the firm can only adjust certain inputs to production, such as labor and raw materials, to meet the current level of demand. Short run costs are typically characterized by fixed costs and variable costs.

1. Fixed costs: These costs do not vary with the level of production output in the short run. They include expenses like rent, utilities, and insurance. Fixed costs remain constant regardless of the level of production.

2. Variable costs: These costs change with the level of production output. Examples of variable costs include wages, raw materials, and electricity. As the level of production increases, variable costs also increase.

Exploring long run costs:

Unlike the short run, the long run allows firms to adjust all factors of production. This means that the firm can change the size of its production facility, invest in new technology, or modify the quantity of inputs used. In the long run, all costs become variable costs.

1. Economies of scale: In the long run, firms have the flexibility to expand their production capacity. This often leads to economies of scale, which occur when increasing the scale of production results in lower average costs. Economies of scale can be achieved through specialization, bulk purchasing, or spreading fixed costs over a larger output.

2. Diseconomies of scale: While economies of scale exist, there is also the possibility of experiencing diseconomies of scale in the long run. This occurs when the firm becomes too large and faces difficulties in managing its operations efficiently. As a result, average costs may start to increase.

Why long run cost never exceeds short run cost:

The long run cost curve is typically lower or equal to the short run cost curve due to the following reasons:

1. Greater flexibility: The long run allows firms to adjust all inputs to production, enabling them to optimize their cost structure. Firms can invest in more efficient technology, streamline operations, and take advantage of economies of scale.

2. Elimination of fixed costs: In the long run, all costs become variable costs as firms have the ability to adjust their production facilities. This eliminates the burden of fixed costs, which tend to be higher in the short run.

3. Economies of scale: As mentioned earlier, firms can achieve economies of scale in the long run, leading to lower average costs. By expanding production and spreading costs over a larger output, firms can benefit from increased efficiencies and lower per-unit costs.

Conclusion:

In conclusion, the long run cost of production never exceeds the short run cost due to the greater flexibility and optimization opportunities available in the long run. Firms can adjust