AS & A-Level Economics — Production, Costs, Revenue and Profit

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Original Deckloop economics study material on production, costs, revenue and profit, with 100 practice cards and 20 concept explainers. Includes worked applications and analytical reasoning.

Economics EN A-Level

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Fixed and Variable Factors of Production

In economics, the short run is defined as a period where at least one factor of production is fixed in quantity, while others are variable. Fixed factors are inputs whose quantity cannot be easily changed in the short run, such as factory buildings or heavy machinery. Their costs, known as fixed costs, must be paid regardless of output. Variable factors, like raw materials or most labour, can be adjusted in quantity to change the level of output. Their costs, variable costs, change with output. This distinction is crucial for firms making production decisions, as it determines which costs are avoidable and which are not in the immediate term. In the long run, all factors of production are considered variable.

Key points

The short run is a period where at least one factor of production is fixed.
Fixed factors cannot be altered in quantity in the short run, leading to fixed costs.
Variable factors can be adjusted to change output levels, incurring variable costs.
All factors become variable in the long run, allowing for full adjustment of scale.

Worked example

Question

A neighbourhood repair workshop has a one-year lease on its premises and owns a fixed set of workbenches. It can buy more spare parts and vary technician hours. Identify the fixed and variable inputs over its short run.

Solution

1. Use the period and adjustment constraints in the question to classify each input.
2. The lease and existing workbenches fix part of the productive capacity during this period.
3. Parts purchases and technician hours can respond as the workload changes.

The premises and existing workbenches are fixed; spare parts and technician hours are variable. The distinction concerns adjustability within the specified period.

Common pitfalls

Misconception: The short run is always a specific calendar period, like six months. Correction: The short run is defined by the existence of at least one fixed factor, not a specific duration. For some industries, this might be days; for others, years.
Misconception: Fixed factors have no cost. Correction: Fixed factors incur fixed costs (e.g., rent, depreciation on machinery) that must be paid even if no output is produced in the short run. They are unavoidable costs in the short run.

Prerequisites

Deck 01 — Short, Long and Very Long Runs: Understanding the definition of the short run and long run is fundamental to distinguishing between fixed and variable factors, as the distinction itself is defined by the short run.
Deck 01 — Land, Labour, Capital and Enterprise: Knowledge of the basic factors of production (land, labour, capital, and enterprise) is necessary to classify them as fixed or variable inputs.