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QUESTION
Costs of Production
Which one of the short-run cost curves would not be affected by an increase in the wage paid to a firm’s labor?” Please be explicit and analytical. Providing also rational explanations.
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| Subject |
Business
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Pages |
2 |
Style |
APA |
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Answer
Cost of production
Cost is a vital component of production. According to Heijdra (2017), the cost of production plays an essential role in the prices of commodities, the ability of the products or services to compete in the market and the level of profits made by an organization. For these reasons, organizations often rely upon economic graphs to monitor their costs of production since they measure the level of output in relation to the inputs( resources ) spent by the organization.
Labor as a factor of production is one of the areas that increases organizations cost of production since employees have to be paid wages and salaries, making it a recurrent expense. Fluctuations in the cost of labor such as an increase or decrease in wages paid often affects all the other short run cost curves such as the marginal cost curve, average variable cost curve and the total cost curve. However, such fluctuations do not affect the average fixed cost curve in the short run.
According to Heathfield (2016), average fixed cost curve shows the relationship between the outputs a firm produces and the average cost of inputs used to produce the products holding other factors such as resource prices and technology used constant. The wages paid to employees to produce a commodity forms part of resource prices used to produce the commodity. Therefore, since avergage fixed cost curves holds such factors constant, the graph will not be affected by either an increase or a decrease in the level of wages paid to the workers. Average fixed cost curve is only affected by the number of units produced at a certain fixed cost of production. If the numbers of units are high the average fixed cost of production becomes low per unit. However, if the number of units produced is low, the average fixed cost of production increases per unit.
In conclusion, increase in wages paid to employees does not affect the average fixed cost curve in the short run because the wages given to labor is constant when drawing the average fixed cost curve.
References
Heathfield, D. F. (2016). An introduction to cost and production functions. Macmillan International Higher Education.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
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