Question

Explain the factors that affect the firm's total cost, and explain the behaviour of a typical firms costs in the short run and long run. In addition, what determines the behaviour of a typical firm's costs in the short run and long run.

Answer 1

Factors that affect firm cost are:

• Hourly Wage rate
• Rent of building
• Availability of raw material
• Tax paid on Income
• Interest rate on Loan Borrowed
• Transportation of final output to market

In short run firm have fixed cost and variable cost. Fixed cost are the cost which does not change with level of output produced while variable cost tends to rise with output produced. In short run, firm face fixed cost of rent of building, installment of loan borrowed and variable cost of wages of labor, tax on money earned and raw material to produce goods.

In long run, firm have all cost as variable cost which tends to rise when output rise. For example, in long run they have to rent another building if they wants to raise their production level.

In short run firm tends to avoid fixed cost and try to cut it by maximum while in long run every cost is variable cost which will rise in any case if output produced rises.