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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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Labour and fixed cost

Did you notice anything peculiar about the analysis of labour cost in the video? Try Activity 27 to test your understanding.

Activity 27

In the film, labour on the dairy farm is treated, in the short run, as a (select one option):

a. 

Fixed cost


b. 

Variable cost


c. 

Depreciating cost


The correct answer is a.

Discussion

In many economic analyses, labour is considered to be a variable cost. However, in the agricultural sector it is not unusual to class labour as a fixed cost, such as in dairy production. Typically in dairy production, employee costs are considered fixed, because labour use is not directly related to the quantity of output. The number of employees on a farm are often low and work needs to be done to run the dairy farm, for instance to feed the herd, regardless of the quantity of milk sold. Labour input is considered fixed in the short run and so is a fixed cost. In the long run, farms might require more or less labour depending on future production plans.