Short Run Vs Long Run Cost Analysis

There are many reasons as to why both the short run and long run costs are U-shaped within a business. Short run costs refers to the cost a company will experience in a period of time in which costs are variable, e.g. when a company is releasing a new product. However long run costs refer to those over longer period of time, typically, over the entire product lifecycle. In this essay I will address some of these reasons and explain how they differ from one another in a corporate environment.
Short run costs are originally high due to the investment needed into the product and the way that it will produced. An example of this would be that firstly the product will have to be designed and developed to a level in which the company will be happy …show more content…
To begin with costs are always high due to the lack of buying supplies and materials in higher numbers. This is because of economies of scale. Economies of scale is the idea that with the more units sold by suppliers the lower the cost of each unit becomes. This means that in the long run it tends to be more beneficial for companies to buy higher levels of stock to maximise profit margins. However in some markets this can also be a disadvantage due to technological development. An example of this would be the mobile phone industry which is a constantly developing market which can be changed at any point by the release of a new product. Once economies of scale become a factor in the long run costs this will mean that there is a significant dip in costs seen. This however only applies up to the maximum output of production. Once this point is passed it becomes a case of diseconomies of scale. This means that with the increase of the scale of production comes the sacrifice in the efficiency. This can be for a number of factors such as the equipment level limiting the amount of units that can be produced and therefore the need for an increase in the amount of the equipment available to employees. This involves further investment which will increase average costs and with the addition of new staff to cope with the increase in production output comes the upward slope of average cost per unit in the long term.
To conclude, both short run and long run average cost curves are U-shaped. However, this is for very different reasons. This is because short run costs look at the initial investment and increase in sales that a new product will require. On the other hand however, the long run cost curve is a U-shape due to the factors of Economies, and diseconomies of scale. As a result of this the average costs will tend to fall with this idea before rising again as the diseconomies of scale become a