7.5 Types of Cost, Revenue and Profit — Short-Run and Long-Run Production

2026 Syllabus Objectives

By the end of these notes, you should be able to:

  1. Explain the short-run production function, including fixed and variable factors, and define/calculate total product, average product, and marginal product — and explain the law of diminishing returns.
  2. Define and calculate fixed costs, variable costs, and all short-run cost measures (TC, AC, MC, ATC, TFC, AFC, TVC, AVC), and explain the shapes of the short-run average cost and marginal cost curves.
  3. Explain the long-run production function, including the absence of fixed factors and the concept of returns to scale.
  4. Explain the shape of the long-run average cost curve and the concept of minimum efficient scale.
  5. Explain the relationship between economies of scale and decreasing average costs.
  6. Identify and explain internal and external economies of scale.
  7. Identify and explain internal and external diseconomies of scale.
  8. Define and calculate total, average, and marginal revenue (TR, AR, MR).
  9. Define normal, subnormal, and supernormal profit.
  10. Calculate supernormal and subnormal profit.

Section 1: The Short-Run Production Function

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What Is the Short Run?

The short run is a time period in which at least one factor of production (an input used to make goods) is fixed — meaning it cannot be changed, no matter how much a firm wants to produce more or less.

The long run is a time period long enough for a firm to change all its factors of production. Nothing is fixed in the long run.

Fixed and Variable Factors of Production

  • A fixed factor is an input whose quantity cannot be changed in the short run. The most common example is capital — things like buildings, machinery, and equipment. A factory cannot instantly build a new production hall if demand rises.
  • A variable factor is an input whose quantity can be changed in the short run. The most common example is labour — a firm can hire more workers or ask workers to do fewer hours relatively quickly.

Example: A bakery owns one oven (fixed factor — capital). It can hire more bakers (variable factor — labour) to bake more bread, but it cannot instantly build a second oven.

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