Fixed Costs

A Story

Morning: take your own money and either



NOTE: you can’t build the factory in the afternoon--it is fixed. And you can’t avoid debt payment if you built

Relation to Profits

Long and Short Run.



A True Story

There once was a beer distributor that came upon hard times and accused another beer distributor of doing illegal things to ruin its business. An economist was consulted and reasoned as follows: The amount of money the beer distributor was making was not its profits. Two things were missing: the building was owned by the owners of the business and could be rented instead of being used for the distributorship. the owner and his family could work somewhere else, so their wages should be deducted from the companies profits. When one made these adjustments it appeared that the distributorship was worth nothing even before the competitor arrived on the scene. I personally know of two more essentially identical stories, one involving a small pharmeceutical company and another a furniture factory.