How to Calculate STC

A short-run total cost (STC) is the total cost of an operation in the short run. The emphasis placed on the short run is often due to the price of labor and materials being relatively stable throughout short periods of time. Because the short-run total cost is a function of labor price, amount of labor needed in production, fixed capital and the cost of using capital at the current time, all of these variables (or functions if not computing a single number) need to be known before calculating the STC.

Instructions

    • 1

      List the values of the needed variables. Let the wages paid for labor be "w." Call the amount of labor used "L" (this can be a function of the units produced and labor needed as well as a specific value). Label the cost of using capital "r." Define the amount of fixed capital as "K."

    • 2

      Solve the relationship between the units produced and labor for L if L is not known. Often, you do not directly know the labor needed, but do know how the output of production is related to labor. In this case, you have a function x(L,K). Solve this function for L. For example, if x(L,K) = sqrt(L*K), where "sqrt" is the square-root function, solve the function for L by squaring both sides and dividing by K. The solution here is L = x^2/K.

    • 3

      Put L in numerical form or in the form of a function with only one variable (namely x). If L is a function of x and K, use the known value of K to remove that variable from the equation. For example, if K = 100 and L = x^2/K, write L = x^2/100.

    • 4

      Multiply w by L. For example if w = 20 and L = x^2/100, L*w = x^2/5. Call this result "HS."

    • 5

      Multiply r and K. For example, if r = 1 and K = 100, rK =100. Call this result "RHS."

    • 6

      Add LHS to RHS to yield the STC. In our example LHS + RHS = x^2/5 + 100. This function represents the STC of producing x units.

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