Supplementary Costs Those

Supplementary Costs Those

Supplementary Costs, those to which a firm has been committed by past decisions and which cannot be avoided by varying current output. Broadly they refer to the overhead costs incurred by a firm producing nothing but remaining in business, e.g., local rates, loan charges and cost outlays on fixed equipment that has been 'sunk' into the financier and that are being 'written off' or amortized over a period of time. Supplementary costs may be contrasted with the prime costs of production, viz.: those which vary with output and which can be avoided by reducing output, e.g., electric power, raw materials, labour.

The economic significance of the distinction between supplementary (unavoidable) and prime (avoidable) costs is that although all costs must be covered in the long run by the revenue received for its output if a firm is to stay in production, there may be shorter or longer periods (depending on the character of the supplementary costs in each case) during which a financier will continue to produce as long as prime costs are covered by revenue from sales and a contribution, however small, is made to supplementary costs. Since even if it reduced output to zero there is no way in which it can avoid supplementary costs it may as well produce as not so long as prime costs are covered. In some lines of production, e.g. small-scale farming, most costs are unavoidable during a season: therefore prices paid to producers might fall severely without much reducing the supplies they are willing to put on the market.

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