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The Short-run Cost is the cost which has short-term implications in the production process, i.e. these are used over a short range of output. These are the cost incurred once and cannot be used again and again, such as payment of wages, cost of raw materials, etc.

In a short-run, at least one factor of production is fixed while the other remains variable. Therefore, in the short-run, the level of output can be increased only by increasing the variable factors such as labor, raw materials while the other factors such as capital, plant size, remains unchanged. The short-run cost includes both the fixed cost (that do not change with the change in the level of output) and variable cost (that varies with the variations in the level of output). Some factors remain fixed due to the time constraints imposed on a company.

In the short run, the shape of the average total cost curve (ATC) is U-shaped. The, short run average cost curve falls in the beginning, reaches a minimum and then begins to rise. The reasons for the average cost to fall in the beginning of production are that the fixed factors of a firm remain the same. The change only takes place in the variable factors such as raw material, labor, etc.

As the fixed cost gets distributed over the output as production is expanded, the average cost, therefore, begins to fall. When a firm fully utilizes its scale of operation (plant size), the average cost is then at its minimum. The firm is then operating to its optimum capacity. If a firm in the short-run increases its level of output with the same fixed plant; the economies of that scale of production change into diseconomies and the average cost then begins to rise sharply.

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