A short run cost function represents an array of values of total cost estimates for producing different levels of production in a given scenario. These kinds of estimates can provide insight on theoretical levels of production for just one product, or for a range of products. The short run cost function includes different variables affecting the total estimated output.
In general, the short run cost function allows business leaders to consider what happens if they increase or decrease production in their facilities. Many of these functions are represented on a graph with x and y axes, where business leaders can see visually how costs increase as production increases. It’s unusual for costs to decrease with a production increase, which is why many of these graphs include a specific sort of line contour that proceeds up and to the right from the original zero axis in the graph’s center.
In contrast to another type of estimate called the long run cost function, a short run cost function includes some restrictions on changes for variables. Some experts explain it this way; in the short run, things like equipment capacity and plant size cannot be changed. That makes the short run cost function more concrete and limited than a long run cost function, which can include more changes in variables. The short run function “assumes” certain things that the company can’t change without extensive contracts and initiative.
Some variables are inherent in the short run cost function. These include the organization of labor and other similar factors. These variables will impact a short run cost function as it is presented.
Aside from giving the leadership of a business or company more concrete ideas about the costs of production, a short run cost function can also lead to greater analysis of net income. Where the analysis of production is just one piece of a larger design, a short or long run cost function, or a comparison of both, can be extremely valuable to a more complex equation. Many of these functions are represented through gathering data on decision support software or other kinds of technology, where computers assist humans in making high-level complex decisions about production, advertising, organization of labor, or any other aspect of ongoing business operations.