Question

Faced with constantly changing conditions, why would a firm ever keep any factors fixed? What criteria determine whether a factor is fixed or variable?

1) Some factors are simply fixed inputs by definition. For example, plant and equipment are fixed inputs regardless of the time horizon.
2) The production of most goods requires the use of both fixed and variable inputs. Fixed inputs are inputs that are not consumed during the production process, while variable inputs are consumed during the production process.
3) Some factors are fixed in the short run, whether the firm likes it or not, simply because it takes time to adjust the level of the variables.
4) Some factors are fixed in the short run, whether the firm likes it or not, simply because the firm may not have the resources to adjust the level of the variables.

Answer 1

Firms keep factors fixed due to the nature of certain inputs that cannot be easily adjusted, like equipment or rental agreements. Fixed inputs define a firm's production capacity and result in fixed costs that don't change in the short term, despite changing production levels. These inputs are often tied to long-term contracts or resource limitations that prevent rapid adjustment.

Step-by-step explanation:

A firm may keep some factors fixed despite changing conditions for several reasons. Fixed inputs, such as plant and equipment, cannot easily be adjusted in the short run. Factors that are not consumed during the production process are considered fixed because they define the firm's maximum output capacity. This is similar to how the potential real GDP represents the maximum output for a society at a given time with its available resources.

Moreover, we can decompose costs into fixed and variable costs. Fixed costs, associated with fixed inputs like rent on a factory or capital costs, do not change with the level of production in the short run and are essentially sunk costs. On the other hand, variable costs are tied to the production process and show diminishing marginal returns, leading to an increase in marginal costs with higher output levels.

In the short run, firms might not have the flexibility to adjust their levels of fixed inputs due to long-term contracts or the time required to modify the production capacity, which is why some factors remain fixed. Additionally, firms may lack the resources to make such adjustments quickly, reinforcing the need to operate with certain fixed inputs.