Economics Short Run Vs Long Run Costs Questions Medium
Sunk costs refer to the costs that have already been incurred and cannot be recovered or changed regardless of future decisions. These costs are irrelevant in the decision-making process because they are already spent and cannot be recovered.
In the short-run, sunk costs are not relevant because they have already been incurred and cannot be changed. When making short-run decisions, such as whether to continue producing a certain product or shutting down a particular production line, managers should only consider the costs and benefits that will occur in the future. Sunk costs should not be taken into account as they cannot be recovered and should not influence the decision.
On the other hand, in the long-run, sunk costs may have some relevance. In the long-run, firms have more flexibility to adjust their operations and make strategic decisions. While sunk costs cannot be recovered, they may still have an impact on long-run decisions. For example, if a firm has invested a significant amount of money in a particular technology or infrastructure, they may be more inclined to continue using it in the long-run, even if it is not the most efficient option. This is because abandoning the sunk costs and switching to a different technology or infrastructure would require additional costs and investments.
However, it is important to note that even in the long-run, sunk costs should not be the sole determinant of decision-making. Managers should still consider the future costs and benefits associated with different options and make decisions based on the overall profitability and efficiency of the alternatives.
In summary, sunk costs are costs that have already been incurred and cannot be recovered. In the short-run, they are irrelevant and should not influence decision-making. In the long-run, while they may have some relevance, they should not be the sole determinant of decisions and should be considered alongside future costs and benefits.