Difference between traditional theory of cost …

The traditional and modern theory of cost

• The traditional theory of cost consists of short and long-run costs. The short-run is fixed for some period and consists of usually entrepreneurship and equipment. The long-run is the cost over which the factors becomes variable.  

• The short-run costs of traditional method include TC = TFC + TVC. They include the salaries of administrative staff, wear and tear of machinery, and expense of land and depreciation.  The variable costs include the raw materials and costs of indirect labor.

• The long-run costs of the traditional method said to be in the form of a planning curve, which guides in decision making and expansion of future output. It is derived from the short-run average costs.

• The modern cost theory regards the shape of curves and appears to be in the form of U shaped. The short term curves are AFC, SMC, SAC  derived form the tola fixed, and variable costs.  

• Long term cost curves are L shaped and curves fall after a point and may slope down gently.