Question

2. How many cost functions in the SR and how many cost functions in the LR? Why do they differ?

Answer 1

There are basically four types of cost functions in the short run. these include average variable cost function average total cost function average fixed cost function and marginal cost function.

In the long run there are only two major cost function, average cost function and marginal cost function.

The distinction lies in the fact that in the short run there is only one or few variable factors while some other are fixed factors. fixed factors of production have to be paid a cost that is not depending on the level of output produced. Due to this reason there is fixed cost as well as variable cost which gives rise to four different functions in the short run

In the long run the distinction between the fixed input and variable input vanishes and all factors are considered variable. This implies that there is no fixed cost in the long run and hence, average variable cost function and average fixed cost function are no longer operative in the long run.