Fixed and Variable Costs

The most common approach to costs in the short and long run might be as follows: in the short run, we have three major categories of costs:

Variable costs (VC) are costs that can be varied flexibly as conditions change. Usually the labor costs are the variable costs.

Fixed costs (FC) are the costs that stays the same. And the question is: how long is that span of time? And the question is we can’t say because it differs sufficiently for different firms. Suppose that firm employs ten carpenters for its carpentry workshop and they sign contracts for a year. At the same time they do not have its own equipment and should rent it from the other firm. In this case half a year – is a short run, while two year – long run.

So, the main difference between the long and short run is that in the long run all costs are variable. Here is a picture of the fixed costs, variable costs and the total of both kinds of costs:

Notice that the variable and total cost curves are parallel, since the distance between them is a constant number – the fixed cost.

Дата добавления: 2014-01-11