Week 4 Discussion Questions Essay

1755 Words Nov 15th, 2014 8 Pages
From the scenario for Katrina’s Candies, determine the relevant costs for the expansion decision, and distinguish between the short run and the long run costs. Recommend the key decision-making criteria that Katrina’s Candies should use for expansion decisions in the short run and in the long run. Provide rationale for your response.
Relevant costs are those that are avoidable or can be eliminated by choosing one alternative over another. Relevant costs are also known as differential, or incremental, costs. In general, variable costs are relevant in production decisions because they vary with the level of production. Likewise, fixed costs are generally not relevant, because they typically do not change as production changes. However
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The logic is that, even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. (One reason for this likely has to do with long-term leases and such.)
Long-run costs- In contrast, economists define the long-run as being the time period when all the factors of production can be changed. So in the example above, the company can now look to expand its warehouse or factory capacity without any problems.
Ex: Most businesses make decisions not only about how many workers to employ at any given point in time but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. Therefore, the long run is defined as the time horizon necessary to not only change the number of workers but also to scale the size of the factory up or down and alter production processes as desired.
Source: http://www4.ncsu.edu/~rsawyers/webpage/acc220/Chapter5.pdf
http://wps.pearsoned.co.uk/ema_uk_he_boakes/104/26857/6875577.cw/content/index.html
http://economics.about.com/od/perfect-competition/a/The-Short-Run-Versus-The-Long-Run.htm

Hi Cilla,
Great post and I agree that there are factors which cause a company to experience a short-run cost. I would also like to add that in the short-run, a firm…

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