Nature of Costs in the Long Run

The nature of costs, whether fixed or variable, depends on the timeframe considered. A short run time period is any time frame where the quantity of at least one input is fixed. This can be due to unchangeable contractual obligations such as machinery lease contracts or physical capacity such as factory space.

In a software company, short run fixed costs could include the office lease, computer equipment, and server maintenance. These costs are fixed because they remain constant regardless of how many projects the company undertakes.

Variable costs could include paying the salaries of software developers, buying office supplies, and licensing fees for additional software tools for specific projects.

The long run decision making time period is defined as that period when the quantity of all inputs can be changed. For example, if the company needs to expand, it may have to rent additional office space.

So, when the sources of the short-run fixed costs must be increased in quantity to facilitate the expansion, such as leasing additional office space, buying more computer equipment, and increasing server maintenance costs, then these new sources of production costs are treated as varia