I'm having difficulties in understanding the effect on fixed costs and marginal costs when there is the introduction of technology in the firm for short run term. Can you explain to me and with the...

I'm having difficulties in understanding the effect on fixed costs and marginal costs when there is the introduction of technology in the firm for short run term. Can you explain to me and with the help of diagram as well because I really don't understand it. Thanks!

Asked on by lilac

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Part of the answer to this question is very straightforward but part of it depends on the exact situation. When a firm adds technology, its total fixed costs go up.  Fixed costs are the costs that the firm faces regardless of how much or how little it produces.  Imagine a firm that makes clothes.  Once it buys its sewing machines, they are a fixed cost because it does not cost more to use them more, or less to use them less.  Once the technology is added, it becomes part of the firm’s fixed costs.  (This could happen if, for example, the clothing firm buys a lot of machines for pressing the cloth.) The fixed costs are higher than they were before the firm had that technology.

By contrast, adding technology should lower marginal costs. The firm would not have added the technology if the technology would not lower the marginal costs.  Marginal costs are the costs the firm incurs to make the next unit of product.  If the clothing firm spends a total of $150 on things like sewing machines, cloth, and labor to make one shirt and a total of $151 to make two shirts, the marginal cost of the second shirt is only $1 because that is the extra amount that it cost to make two shirts as opposed to one.  Technology is generally good at reducing marginal costs.  With technology, goods can be made faster and cheaper.  Let us think of the clothing firm again. Imagine that the workers at the firm have to sew shirts by hand.  This takes a long time so the labor costs (which are part of the marginal costs) are high for each shirt.  Now the firm brings in sewing machines.  Workers can sew each shirt in a small fraction of the time it used to take.  This makes marginal costs go down.

Thus, when technology is added, total fixed costs go up and marginal costs go down.

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