# What Types of Problems May Arise When Measuring Cost for Short-Run Cost Estimation? Why Are They Considered Problems and What Are Possible Resolutions?

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Short-run cost functions should be estimated using data for which the level of usage of one or more of the inputs is fixed. Usually time-series data for a specific firm are used to estimate short-run cost functions. Analysts should be careful to adjust the cost and input price data (which are measured in dollars) for inflation and to make sure the cost data measure economic cost. The following are the two possible problems that may arise when measuring cost for short-run cost estimation: Correcting data for the effects of inflation Economic analyses often use data from two or more calendar years. Price inflation causes the value of a dollar to fall over time, and so the same dollar amount in two different years will usually represent different amounts of purchasing power. To counteract this problem, analysts typically adjust dollar figures to account for inflation. Figures that have not been adjusted for inflation are said to be in 'nominal dollars,' while those that have been adjusted are in 'real dollars. Using the nominal dollar does not give the correct short run cost estimaate. Following graph depicts the effect of inflation on cost One of the method firms use for adjusting for inflation is by deflating nominal cost data using an implicit price deflator. Usually the deflator value is obtained from Survey of current business for a period question. Nominal cost is divided by deflator to arrive at the real cost. Using real cost will help up the firm to come up with good a short run cost estimate. Since short run involves a smaller period the effect of inflation on input prices is ignored. Example Considering a cost of \$1000 incurred by a firm in 2012. Accounting for inflation and applying the implicit price deflator of 98.97%. The real cost is calculated as \$989.70. Problems Measuring Economic Cost The cost of using resources in