Question

Below is the explanation as to why some costs are considered to be variable and some fixed. After reading below, please Illustrate using curves How does time enter into the definition.

            Costs are considered variable if they can change with output. On the other hand, costs are considered fixed if they do not change with output. Time enters in the logic that all fixed costs become variable in long run. In short run, some costs cannot change with output and are therefore called fixed costs. In short run, some costs are fixed and some are variable. Fixed cost does not change with change in output level. On the other hand, variable cost changes with a change in output level. Zero output means zero variable cost. Fixed cost is connected with short run, the firm has to make certain essential expenses, such as rent on leased factory, salaries of permanent employees. These expenses remain the same irrespective of output level. Both of these costs are detached in order to make choices such as variable costs incurred if a particular used and the fixed costs still incurred if the vehicle is left unused. The break-even points etc. shall be found by means of this analysis.

Answer 1

Fixed costs, indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as interest or rents being paid per month, and are often referred to as overhead costs.

Variable costs are costs that change as the quantity of the good or service that a business produces changes. Variable costs are the sum of marginal costs over all units produced. They can also be considered normal costs.

Short run costs are accumulated in real time throughout the production process. Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production. Variable costs change with the output. Examples of variable costs include employee wages and costs of raw materials. The short run costs increase or decrease based on variable cost as well as the rate of production. If a firm manages its short run costs well over time, it will be more likely to succeed in reaching the desired long run costs and goals.

Long run costs are accumulated when firms change production levels over time in response to expected economic profits or losses. In the long run there are no fixed factors of production. The land, labor, capital goods, and entrepreneurship all vary to reach the the long run cost of producing a good or service. The long run is a planning and implementation stage for producers. They analyze the current and projected state of the market in order to make production decisions. Efficient long run costs are sustained when the combination of outputs that a firm produces results in the desired quantity of the goods at the lowest possible cost. Examples of long run decisions that impact a firm’s costs include changing the quantity of production, decreasing or expanding a company, and entering or leaving a market.