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ACCT 302 Cost Accounting- Short and Long Run Decision

Fixed costs are often defined as fixed over the short run. Does this mean that they are not fixed over the long run? Why or why not? What is the difference between short-run and long-run decisions? Give an example of each.

Answer

Fixed Cost

Fixed costs are defined as costs that do not vary with the level of output. Even if the firm shut down its operation then also the firm is bound to pay such cost. It is fixed in the short run. However, in the long-run with all the variable factor input there is no fixed cost to be considered. Fixed costs are not fixed permanently. Fixed costs are fixed for a certain period in relation to output, defined as short run in production (Gopinath, Helpman & Rogoff,  2014). In long run, there is sufficiently long time that there is no fixed input entailing fixed cost. For example- in the short run capital-intensive firm fail to capitalize changes in response to demand change but in the long-run they can easily shrink or expand their operation.

Short run and Long run decision

Short run in production operation is defined as a time when at least any of the factors of production remain constant. The time is short in the sense that it is not possible to bring some major changes in business decision. Long run on the other hand indicates period of time when all the factor of production are variable (Drucker, 2017). Business gets sufficient time to take some major business decision. Example – Short run decision of the firm may include hiring more laborers to increases worker strength of the firm. Any decision related to capital expansion corresponds to long run decision. In the long run firm may think of installing a new advance machine or expanding plant size.

Reference

Drucker, P. F. (2017). The Theory of the Business (Harvard Business Review Classics). Harvard Business Press.

Gopinath, G., Helpman, E., & Rogoff, K. (Eds.). (2014). Handbook of international economics (Vol. 4). Elsevier.

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