Sunday, 4 June 2017

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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