Labour

Organizations always have a plan to maximize profit. All decisions can be placed into two time frames: short run and long run.

In the short run, the capital (firm’s plant), building a new factory, buying a new land, are all fixed costs, in which the plan cannot be changed in a short period of time. But for the resources used by the firm, such as labor, raw materials and so on, they can be changed easily. The resources used that can be changed is called variable cost. The short run decisions are easily reversible.

While in the long run, all resources are variable. Plant size, hiring new employees and all other variable costs, all of them can be changed any time. But the decisions are not easily reversible. This is because the sunk cost for reversible is too high. A firm needs to pay a high cost for the reversing decisions.

Labor is a variable cost in the long run. But, how about in the short run?

In the short run, labor is still a variable cost. As I said before, labor is a decision which can be change easily. For example: a company XYZ found that there lack of human resources this month. So they are hiring 10 new employees to the company. But after two months, Company XYZ realized that 10 employees are over-hired. The output is not efficient and effective. So they decided to fire 7 of them. What we can see that, every single decision can make or rejected.

But if let said we discuss about the plan size, company XYZ want to increase the plan size. It cannot set a plan and apply the plan in a short period. Company must take a long time to do research and data analysis to make sure that the plan size is really needed for the company. Once the plan is set, company XYZ must try to achieve the goal. So plan size is the fixed cost in the short run.

How short run of labor related with the long run?

The Total Fixed cost add with the Total Variable Cost will get a Total Cost (TFC+ TVC=TC). Total Cost divided by the number of input will get the Average Total Cost.

In a year, a company will have few ATC curve. Linked all the minimum of ATC curve, you can get a Long Run ATC curve.

What is Long Run Production Cost? Does Labor related with it?

Long Run production Cost is explain the long run ATC with economic of scale, constant returns to scale and diseconomies of scale. No only labor, all variable cost in short run and long run related with it. This is because all the variable cost is linked to create a Long Run ATC.

When we apply labor specialization in the short run and long run, the stage 1 of Long Run ATC will show a economies of scale. This is because the labors keep repeating do a same job, and become expert in the work. The quality and quantity of output will increase. Less workers but still can produce lots of output. The Total cost is decreasing. Hence, the ATC will decrease.  

After few months, labors reach the maximum quality and quantity of output. No matter how to push them, they will not produce more output. The total cost maintains the same. Hence, the ATC remain constant also. This is stage 2, Constant Return to Scale.

But due to the repeating of works, labors will few boring. Some of the worker will quit from the job some more. So the output will decrease. In order to get profit, company will hire new employees. As a result, the AVC increased. Hence ATC increase at the same time. This is the stage 3, Diseconomies of Scale.

As a conclusion, labor is a variable cost in the long run and short run. Although labor is one of the variable cost in the short run, but it still affected the Long Run ATC and the Long Run Production Cost.



Reference list:
http://economics.about.com/cs/studentresources/a/short_long_run.htm

Vengedasalam, D. and Madhavan, K. (2007) Principle of Economic.Malaysia: Oxford Fajar Sdn. Bhd.
Taylor, J.B. and Weerapana A. (2010) Principle of Economic. United Stated of America: South-Western Cengage Learning.

http://yourbusiness.azcentral.com/specialization-labor-9939.html

http://smallbusiness.chron.com/specialization-labor-3890.html