Hi, welcome to economics. This is Kate. This tutorial is on fixed and variable inputs. As always, my key terms will be in red. And my examples will be in green.
So in this tutorial, we'll be talking about the two different types of inputs-- fixed and variable. I'll define and give examples for you of those fixed inputs. And then I'll do the same for the variable inputs. And then finally, we'll end by talking about how the long run and short run are actually defined by whether inputs are fixed or variable. So we talk about fixed and variable inputs and the definition of both the long and short one.
So we know that firms have to purchase factors of production or inputs, which are land, labor, and capital in order to produce anything. And it turns out that these inputs are either going to be categorized as fixed or variable. Hence the subject of this tutorial. So let's start with fixed inputs.
Fixed inputs are factors of production that cannot be changed in the short-run. They are a constraint. They are something that stays exactly the same. Hence, that's what the word fixed means.
It stays the same and there's nothing they can really do about it. So no matter how much they decide to produce, these are going to stay the same. And in fact, their cost is going to stay the same as well.
Firms are always trying to figure out where they're going to be most profitable in terms of production levels. And these fixed inputs do not vary at all with production. A really good example of a fixed input and one that's often given is their building, or factory, or office space. Most businesses have a lease for a specific period of time.
And even if they produce zero-- if the business is not doing well at all or for whatever reason they actually shut down all production, they still have to pay their rent under the terms of their lease. If they decide to produce more and really ramp it up, it's not as if their landlord can say, oh, you're producing a whole lot more now, you have to pay me more. No, again, they have a lease, it's a contract, and that same payment comes out every single month. If we wanted to compare this to a personal situation, you might look at your own mortgage or rent that you pay.
You have a contract that says you have to pay this same amount every single month. And let's say you went on vacation in Europe for an entire month and you didn't live in your house at all, you can't call your bank and say you know what, I'm just not going to pay this month because I didn't live there. And likewise, once you get back, now you're living there every day, your mortgage doesn't go up or down depending on how much you stay there. It's the same amount.
A variable input is going to be the opposite, it does change. So a variable input is one of the factors of production that does depend upon the level of production. These change depending upon how much we choose to produce.
So their cost is going to change as well. Examples of variable inputs are labor or machinery. If things are going really well, the firm can really quickly hire some new workers. And therefore, they're going to have to pay more in their labor cost. They can buy some new machines.
If things are not going so well, they could certainly lay off a few workers, or sell off some of their machines perhaps. With the personal example I used, let's say you're away on vacation for the entire month, certainly your mortgage payment or your rent stays the same. That was the fixed cost. But if you're away, aren't your utility bills probably going to be much lower? You're using your electricity, you're not using your water, maybe your gas. So that would be a variable cost for you. Once you get home, your utility bills then go back up again.
So how do we use these talk about the long-run versus the short run? They actually define the difference between the long-run and short-run. My students are often asking me, it was the short run, isn't it like three months, six months, a year, give me a time. It's not an exact time. It's defined as the time in which there's at least one fixed input or cost.
So for example in the short-run, you cannot immediately expand your factory or get out of your currently lease. That's why it's fixed. But whenever you can, whenever your contract is up and you can renegotiate it, that then becomes the long-run. So the long run is defined as the time period where all inputs and costs become variable, become something that you can change. And so you can renegotiate your lease, you can make major changes to the firm in the long-run.
So in this tutorial, we talked about the differences between different types of inputs. So fixed and variable. Fixed, again, ones that don't change. Variable are ones that do change. The short-run is defined as the time period where there is at least one fixed input. And the long-run is the time where everything becomes variable. Thank you so much for listening. Have a great day.
A factor of production (input) that cannot be changed in the short-run.
A factor of production (input) that depends upon the level of production. Variable inputs change depending upon how much we choose to produce.