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Explain why some costs are considered to be variable and some fixed. How does time...

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yaga49 | (Level 1) Valedictorian

Posted May 14, 2013 at 1:24 PM via web

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Explain why some costs are considered to be variable and some fixed. How does time enter into the definition?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 14, 2013 at 1:43 PM (Answer #1)

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When looking at the costs that a firm incurs as it produces, we say that some costs are fixed and some are variable.  We say this because, in the short run, there are some costs that cannot change depending on the level of production.

Let us say that you start a delivery service.  You will pick up anything within certain size limits and deliver it anywhere in your service area.  In order to do this, let’s say that you have to buy or lease three cars.  These cars are now a fixed cost.  You will have to pay the loans or the leases on those three cars regardless of whether they are in constant use or are used only once a day.  By contrast, the cost of gas and drivers is a variable cost.  The more deliveries you provide, the more you have to pay for these things.  Because some costs change with production and some do not, it is useful to distinguish between them.

In the long run, though, there is no such thing as a fixed cost.  If your business goes better than expected, you can buy more cars.  If it goes worse than expected, you can stop leasing one of the cars when the lease expires, or you can sell a car that you have bought.  These kinds of changes take time, so in the short run some costs are fixed.  In the long run, however, they are not.

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