Cost Structure of the Firm

We can look at the business firm from at least two points of view: productivity, inputs, and outputs (as we have just done) or outputs and costs. In advanced microeconomics, these two points of view are called "duals." They are equally valid, but they point up different things. They are also opposites from a certain point of view -- the higher the productivity, the lower the costs. By looking at the firm from the point of view of costs, we shift our perspective somewhat, and gain a much more direct understanding of supply.

We also look more directly at the difference between the long and short run. In the short run, we have two major categories of costs:

fixed costs, and
variable costs

In the long run, however, all costs are variable. Thus, we must study costs under two quite different headings. Costs will vary quite differently in the long run and in the short.