Tuesday, January 8, 2013

Why are there no fixed costs in the long run ? I mean companies still have to pay rent and stuff. Those are fixed costs. Right?

"Fixed costs" are only "fixed" to a certain degree. Investments in land, buildings, equipment, and people -- and this latter category, people, is subject to numerous variables -- represent fixed costs to the extent that they constitute productive components, but productivity declines with aging equipment, buildings need to be maintained (and old buildings with equally old heating and cooling systems and plumbing and electrical systems are all expensive to maintain and/or replace), and the retirement of senior-level (i.e., experienced) employees necessitates the hiring and training of replacement personnel. In short, "fixed costs" are "fixed" only for a limited period of time. Property taxes alone can change "fixed" costs associated with real estate. Recapitalization of a factory represents an enormous long-term expense that will, for a certain period of time, establish new sunken or fixed costs. Rent, the question suggests, represents a "fixed cost," but rent is anything but fixed, as rents are generically increased at a minimum to reflect the rate of inflation lest the land or property's owner begin to suffer financial losses from rent levels that represent diminished value due to inflation. Investments in physical plant, in short, represent fixed costs only to the degree that the buildings and equipment remain adequate to the task and, as importantly, remain consistent with environmental and other regulations imposed over time by state and federal governments. Imposition of new regulations pertaining to factory emissions, for example, can translate to new financial investments in equipment and processes necessary to be in compliance with those regulations.


There are, as others pointed out, numerous variables involved in determining "fixed costs" at specific points in time. Suffice to say, it is a fluid situation, termination notwithstanding. 

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