Question

What are some examples of long-term costs?

Answer 1

Long-term is a complex concept in economics; long-term costs probably refers to costs that cannot be changed in the short-run.

Explanation:

The distinction between long-term and short-term is the time-horizon, and we usually refer to costs as "fixed" or "variable", depending on whether we can change them in the short-run. How long is the short-run or long-run depends on how we are thinking about our costs.

If I build a factory to produce some good, I generally think of the factory as a fixed cost, because I have already built it and can't really change the factory in the near future. However, if I am planning a start up, I haven't built the factory or really done anything. In the planning stage, all costs are variable -- even if I am planning to "fix" some of them as soon as I start.

You should keep in mind these complexities, but in general, economists usually think of long-run or fixed costs as including land and capital. They usually think of short-run or variable costs as including labor and supplies.

So, in a bakery, the land, buildings and ovens are long-run or fixed costs. The baker, the baker's helper and the flour are short-run or variable costs.

You can see how the replacement cycle for the ovens will be shorter than the replacement cycle for the building, most likely. That's an example of how our perspective on costs depends on our time horizon. Most economists would still agree that the ovens are a fixed cost,

In many businesses, because of labor contracts, labor costs are sometimes even considered fixed for a period of a year or so -- although many businesses will distinguish between different specific functions and consider some employees to be fixed costs and others to be variable costs. It's difficult sometimes to resolve these sorts of disagreements.