Short Run and Long Run Cost Estimation Techniques: A Comparative Analysis

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In managerial economics, cost estimation techniques play a crucial role in helping businesses
make informed decisions. These techniques can be broadly classified into two categories: short
run cost estimation techniques and long run cost estimation techniques. In this article, we will
explore three commonly used techniques - extrapolation, gradient, and regression cost estimation
- and discuss how they differ in terms of their applicability and effectiveness.

Extrapolation cost estimation technique involves using historical data to estimate future costs.
This technique is often used in the short run, as it assumes that future costs will continue to
follow the same pattern as past costs. However, this technique has its limitations, as it fails to
account for external factors that may influence future costs. According to authors like Simon
(2010), extrapolation cost estimation technique is best suited for businesses that operate in stable
environments withGradient cost estimation technique, on the other hand, takes into account the
rate of change in costs over time. This technique is more sophisticated than extrapolation and is
often used in the long run. It assumes that future costs will continue to change at the same rate as
past costs. According to authors like Porter (2012), gradient cost estimation technique is best
suited for businesses that operate in dynamic environments with changing cost factors.

Regression cost estimation technique involves using statistical analysis to identify patterns in
historical data and estimate future costs. This technique is more accurate than extrapolation and
gradient cost estimation techniques, as it takes into account multiple cost factors and their
interdependencies. According to authors like Kotler (2014), regression cost estimation technique
is best suited for businesses that operate in complex environments with multiple cost factors.

In conclusion, short run and long run cost estimation techniques play a vital role in managerial
economics. Extrapolation cost estimation technique is best suited for businesses that operate in
stable environments, while gradient cost estimation technique is more suitable for businesses that
operate in dynamic environments. Regression cost estimation technique is the most sophisticated
and accurate technique, as it takes into account multiple cost factors and their interdependencies.
By understanding these techniques, businesses can make informed decisions and improve their
overall performance.