Q. 93.5( 2 Votes )

What is meant by

Answer :

The analysis of a firm is always carried out to understand the costs incurred as well as the quantity of output that the firm produces.

In a short run analysis at least, costs related to one set of inputs remain fixed. For example, if we take two inputs to be labour and capital, either one of them has to remain fixed. The other factor is called variable factor which means it will vary. Therefore, the total costs incurred is the sum of fixed and variable costs.

But in long run since all factors can be varied. To increase the output the firm will increase labour and capital simultaneously. So, there is no fixed factor in the long run and the total costs incurred is the sum of the variable costs itself.

However, one also needs to keep in mind that the short run and long run both are decided by the firm individually depending on their production processes. The period is defined by looking at whether all inputs need to be varied or not.

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