Charles E. Mueller
ANTITRUST LAWS--Laws designed to combat monopolies ("trusts") and other devices to suppress competition. In the U.S., the individual states, as inheritors of the English common law (which condemned a number of these practices), were the pioneers in the anti-monopoly efforts of the late 1800s and many have their own antitrust statutes today. Their lack of success in dealing with such powerful combinations as Rockefeller's Standard Oil (90% of U.S. oil refining at the turn of the century) led to the passage of the first federal antitrust law, the Sherman Antitrust Act of 1890, 15 U.S.C. 1. This was followed by the enactment of the Clayton Act, 15 U.S.C. 12, and the Federal Trade Commission Act, 15 U.S.C. 41, both passed in 1914.
The Sherman Act contains two substantive provisions. Its Sec. 1 declares illegal contracts and conspiracies in restraint of trade and its Sec. 2 prohibits monopolization and attempts to monopolize. The Clayton Act, as later amended by the Robinson-Patman Price Discrimination Act, 15 U.S.C. 13 (1936) and the Celler-Kefauver Anti-Merger Act, 15 U.S.C. 18 (1950), deals with four business practices: price discrimination (Sec. 2); exclusive dealing and tying arrangements (Sec. 3); mergers (Sec. 7); and interlocking directorates (Sec. 8). The Federal Trade Commission Act, as amended, contains only one substantive provision (Sec. 5): "Unfair methods of competition in [interstate] commerce, and unfair or deceptive acts or practices in commerce, are hereby declared unlawful."
BARRIERS TO ENTRY--The condition of entry into an industry or market refers to the presence or absence of "barriers" around it and, if any are present, to their "height." Entry barriers refer to the disadvantages of potential entrants, vis-a-vis already established firms, that impose on the former higher per-unit costs (e.g., royalty payments for the use of patents) or require them to accept lower per-unit prices for goods of the same quality (e.g., buyer preferences for established "brands"). These barriers are measured in terms of how much the established firms can raise the price above a competitive level (see Normal Profit) without inducing new firms to enter. Thus, if existing technology would permit a firm of optimum efficiency to produce and sell product A for $1.00 per unit (including a normal or competitive return on its investment), and if the established firms in the industry are in fact charging $1.15 without inducing the entry of new firms, then there is said to be a "15% entry barrier." The condition of entry into an industry or market is generally classified as either (a) "easy" (no barriers at all); (b) "ineffectively impeded" (barriers too low to make deliberate entry-forestalling worth while); (c) "effectively impeded" (barriers high enough to make entry-forestalling profitable); or (d) "barricaded" (barriers high enough that the full "monopoly" price can be charged without inducing entry by new firms). Entry-forestalling refers to the selection of a price that, while above the competitive floor, is not quite high enough to make the market attractive to the most likely potential entrants.
BEHAVIOR--A term sometimes used synonymously with Conduct, or with both Conduct and Performance. (See also Structure.) The former refers to the basis on which the firm makes its price and output decisions, the most significant being its use or non-use of (a) collusion, either express or tacit (as in tight-knit oligopolies), and (b) predatory and exclusionary practices. The term performance refers to the results produced by the conduct patterns selected, as measured primarily in terms of efficiency, progressiveness (invention, innovation), and the like.
BUSINESS COSTS--Total money expenses, as determined by ordinary accounting methods. See Cost and Business Profit.
BUSINESS PROFIT--Total revenue or gross receipts of the firm, minus total money expenses or costs (see Business Costs). Revenue is simply the number of units sold, multiplied by the average unit price.
COLLUSIVE OLIGOPOLY--A market situation in which the sellers have entered into express agreements on price and output, i.e., a cartel. In general, the smaller the number of firms in a market (and the larger their respective market shares), the less their need to use actual collusion as a coordinating device; "oligopolistic interdependence" is frequently sufficient in the tight-knit oligopolies. (See Oligopoly.) In the looser oligopolies, however, the larger number of firms and their smaller individual market shares greatly weakens that sense of interdependence and hence increases the difficulty of maintaining coordinated prices except through the cartel apparatus of agreements, sanctions, and so forth.
COMPETITIVE PRICE--One that exceeds minimum accounting costs (production and distribution) by an amount that permits the seller a normal return on the capital invested in the enterprise (e.g., 8% after taxes) but no more (see Normal Profit). Defined another way, it is the price that would prevail in the absence of any barriers to entry. (See Condition of Entry.) The principle involved is that, if entry is completely unrestricted, any price that permits more than a normal profit will immediately attract new entrants; their entry will then continue until all monopoly profits have been competed away and the price restored to its former (competitive) level.
CONCENTRATION--The number and size distribution of the firms in an industry or market, most commonly expressed in terms of a "concentration ratio," i.e., the percentage of production or sales accounted for by some relatively small number of firms, generally the "four largest" and the "eight largest." The competitive significance of these ratios is said to lie in the proposition that they are correlated with price levels--the higher the concentration ratio, the further the price is expected to rise above the competitive floor and toward the monopoly ceiling. The mechanism through which this is thought to be accomplished is what is called "oligopolistic interdependence" (see Oligopoly). In substance, as the number of firms decline and the size of their respective shares increases, the incentive to engage in price competition is lessened and their incentive (and capacity) to collude, either expressly or tacitly, is increased.
CONDUCT--The behavior patterns that are expected to follow from the various types of industry Structure, particularly the basis on which an industry's members make their basic price and output decisions, e.g., whether they set their respective prices and volumes independently or collusively. In general, there is said to be a causal connection between an industry's structure (competitive, monopolistic, oligopolistic) and the "conduct" patterns selected by its members. See also Structure and Performance.
COST--As used by the economist, the term cost includes not only the usual business costs as presented by the accountant, i.e., the recorded costs of production and distribution, but a "normal" or competitive profit as well (see Normal Profit). The reasoning is that the services of the entrepreneur, being essential to production and distribution, are no different in this respect than the services of the various other input factors that go into the final product; just as the "wages" of the production worker and the "interest" of the moneylender are costs that society must incur if it is to continue receiving its accustomed goods and services, so it must also pay the entrepreneur for his services in organizing production if it is to continue receiving them. The minimum level, of course, is the one that is sufficient but just sufficient to induce him to continue his efforts.
CROSS-ELASTICITY OF DEMAND--The effect of a change in the price of one product on the sales volume of some other product. Thus, if an increase in the price of butter causes a significant increase in the volume of oleomargarine sold, then there is significant cross-elasticity of demand between those two products.
DEMAND--The number of units of a product that can be sold at each price the entrepreneur might elect to charge. Demand is generally thought of in terms of a "schedule," a matching of prices and volumes in parallel columns. The "law of demand" postulates generally that volume is an inverse function of price--that the higher the price, the lower the volume consumers will buy. Thus, the entrepreneur might learn by experimentation that he can sell 10,000 units at $10 each but that, if he raises his price to $12, he can only sell 9,000 units.
DISECONOMIES OF SIZE--A situation in which larger firm size produces not lower but higher per-unit costs. Typically, a firm's per-unit costs fall fairly sharply at first as output increases, then level off and remain fairly "flat-bottomed" over a mid-size range, and finally climb upward as market power is achieved. See also Economies of Scale.
DOMINANT FIRM--A market situation in which all sellers except one have an insignificant individual share of the market's total sales and hence behave as perfect competitors, while that one large firm, being aware of its ability to influence the marketwide price by varying its individual output, selects its price and output accordingly. In principle, this large firm selects a price, lets its atomistic competitors sell all they can at that price, and then takes the "rest" for itself. The price it selects automatically determines both how much its small competitors will be able to sell and thus how much it gets for itself. (Given the inability of the small competitive firms to influence the marketwide price, they can only expand their volume up to the point where their rising per-unit costs collide with that price ceiling.) By lowering the price, it can force them to restrict their production; by raising the price, it can let them expand. Its own large share generally rests on a price advantage of some sort (see e.g., Product Differentiation) vis-a-vis these numerous smaller firms.
ECONOMIES OF SCALE--The savings that can be realized through the use of producing and selling facilities of optimum size. The optimum size is defined as that which, given the existing state of technology, permits the lowest possible per-unit costs. The competitive significance of this factor is said to lie in the fact that, if a firm must have a relatively large share of its market in order to achieve this optimum or minimum-cost volume, then that market cannot be both efficient and competitive at the same time. Thus, if the volume required for minimum per-unit costs amounts to a market share of 25%, then that market can only support four optimum-size firms; to break them up and produce eight (or sixteen) firms would presumably produce more competition but it would also produce higher per-unit costs, i.e., more of society's scarce resources would be required in order to produce the same output. Empirical studies are said to indicate that this is a relatively rare phenomenon in American industry--that, in all but a few industries, firms reach the optimum size at a point well below that at which significant oligopolistic interdependence sets in.
EFFICIENCY--Efficient allocation of resources means generally that the total or aggregate output of a nation's economy could not be increased merely by transferring some of its resources (dollars of capital and man-hours of labor) from one industry (or firm) to another, a condition that, in turn, requires a certain relationship between the "cost" and the "price" of all products sold. Thus, if a certain number of dollars and man-hours of labor produce a product that sells for $100 in a competitive industry, but could produce a monopolized product that consumers are willing to pay $125 for, then the country's total output is $25 less than it could be. This is the increase in consumer satisfaction (utility) that could be obtained at no additional real cost (dollars of capital and man-hours of labor) by simply transferring those particular resource units from the competitive to the monopolized industry. The economist therefore concludes that the country is inefficiently using its resources when it allows monopolists to block that transfer, i.e., when it allows them to maintain barriers around their industries that, by preventing newcomers from bringing in those additional resources, permit the maintenance of the artificial "scarcity" that underlies the monopoly price.
ELASTICITY OF DEMAND--The percentage change in the quantity demanded of a product, divided by the percentage change in the price charged. Thus, if a 1% price raise resulted in a sales drop of more than 1%, it would be said that the demand for a product was "elastic"; if sales fell by less than 1%, its demand would be termed "inelastic." See also Demand.
ENTRY--The entry into an industry or market of a new and independent decision-maker, a firm that had not previously operated there, plus the construction of new productive capacity. See Condition of Entry.
ENTRY-INDUCING RETURN--A profit rate that is sufficient to induce one or more potential entrants to actually enter an industry or market and construct new productive capacity. See Condition of Entry and Normal Profit.
EQUILIBRIUM_A theoretical position of "rest" in a market, as the price mechanism momentarily brings supply and demand into balance at some specific price-volume combination. See Static-Equilibrium and Dynamic Economy.
FIXED COSTS--Costs that are incurred by the firm whether it produces or not, and that remain constant in amount whether its production volume is large or small. Rent, insurance, and salaries of supervisory personnel are common examples.
HERFINDAHL-HIRSCHMAN INDEX (HHI)--A measure of market concentration that's used primarily in merger cases. See the Justice/FTC Horizontal Merger Guidelines of 1992, §1.5 (Antitrust Law & Economics Review, Vol. 23:2, at 68, 73, n. 17.) This concentration measure is calculated by summing the squares of the individual market shares of all competing firms there. Thus a market consisting of only 4 firms with shares of 30%, 30%, 20%, and 20% has an HHI of 2600 (30 x 30 + 30 x 30 + 20 x 20 + 20 x 20 = 900 + 900 + 400 + 400 = 2600). The HHI ranges from a high of 10,000 (a single-firm monopolist) to a number approaching zero (an atomistic market with, say, hundreds of very small firms). "Moderate" concentration is said to begin with an HHI of 1000 and "high" concentration at 1800. Id., pp. 69-70. The latter is roughly approximated by a top-4-firm share of around 50%.
HOMOGENEOUS PRODUCT--A market situation in which the output of one seller is indistinguishable from that of the market's other sellers, i.e., no seller is able to convince the buyers that his product is sufficiently different (superior) that they should be willing to pay even a penny more for it. This is to be contrasted with the successfully "differentiated" product (see Product Differentiation), one that can command a price premium.
HORIZONTAL MERGERS--Mergers in which the two firms being joined formerly stood in a competitive relationship, i.e., they sold the same or a close substitute product in the same geographical market. See Conglomerate Mergers and Vertical Mergers.
JOINT PROFIT MAXIMIZATION--A situation in which a small number of large firms in an industry or market, recognizing their "oligopolistic interdependence," succeed in raising the price to the level that a profit-maximizing monopolist (single firm) would have selected. At that point, the total industry profit is at an absolute maximum, in the sense that any other price, either higher or lower, would mean less profit to divide among themselves.
LONG RUN--Generally a period of time sufficient to permit the construction of new productive capacity in the industry in question. It is to be contrasted with the "short run," a period of sufficient duration to permit a variation in the quantity offered by established sellers, but too short to permit the construction of new capacity by either established firms or new entrants. In calendar time, the long run thus varies from a period of several years in some very heavy manufacturing industries to perhaps only a few weeks in certain service or distributive trades that require no specialized factors, that can be entered with, say, hired facilities and personnel diverted from other trades.
MARGINAL COST--The cost of producing one additional unit. If the total cost of producing 10 units is $50, and if the total cost of producing 11 units is $54, then marginal cost at that level of output is $4. This is to be distinguished from "average" cost, the total dollar cost incurred during some relevant period of time, divided by the total number of units produced in that period. Here, for example, the average cost is approximately $4.91 ($54 total cost, divided by 11 units), or 91˘ more than the marginal cost. The one includes Fixed Cost (overhead), the other does not. "Constant" marginal costs, the absence of variation at different output levels, indicates the absence of both economies and diseconomies of scale in that output range.
MARGINAL EFFICIENCY OF CAPITAL--The return or yield from incremental investment dollars. In general, business enterprises are expected to continue investing in new plant and equipment as long as the returns they anticipate from each additional project exceed the going interest rate. Thus, the businessman who has three new projects under consideration, these promising a yield of 10%, 7%, and 4%, respectively, is expected to go ahead with the first two if the going rate of interest is 6%, but to put the third one on the shelf until the interest rate falls (to, say, 3.9%).
MARGINAL FIRMS--Firms that, because of higher per-unit costs (relative inefficiency) or other disadvantages, are able to continue in business only because, and so long as, the general market price of the product is above the competitive level. Thus, if intensified rivalry among the more efficient firms forced the marketwide price to the competitive floor, the marginal firms would by definition be forced out of production. Such firms are thought to have considerable competitive significance in some markets, however, in that their presence, and their propensity to increase their output continuously as price rises, puts a ceiling on the price that the larger, more efficient firms would otherwise be free to charge. See Competitive Fringe.
MARGINAL REVENUE--The addition or gain to a firm's revenue (sales receipts) from producing one additional unit, i.e., the difference between the total receipts from the sale of "x" units and from the sale of "x + 1" units. In the case of firms in a perfectly competitive industry, marginal revenue is the same as price; in imperfectly competitive markets, it is always less than price. Thus, if an oligopolist can sell 5 units at $10 each, but can sell 6 units at only $9 each, his marginal revenue from the sales of the 6th unit (the difference between the $50 he got from the 5 and the $54 he got from the 6) is only $4, or $5 less than the price he got for each of the 6, including the 6th one itself. The significance of this phenomena is that such a firm, aware of the revenue loss it has to incur on the earlier units in order to sell such additional units, is thus also aware that its profits can be increased by restricting output and thereby maintaining the price at a higher level than that a group of competitive firms would have been induced to reach.
MARKET--An area in which a group of sellers of some commodity, product, or service and its close substitutes compete for the patronage of a common group of buyers. A market thus has two dimensions, one geographical, the other "product." In general, it is said that two geographical areas, or two "products," do in fact constitute separate "markets" if the one's price changes have no substantial effects on the other's sales volume. See Cross-Elasticity of Demand.
MONOPOLY PRICE--The price that maximizes the monopolist's total profit, considering both price and volume. In general, a monopolist taking over a previously competitive industry would find that profits could be increased by reducing his output below, and raising his price above, the level selected by those competing firms. Ultimately, however, a point is reached where the gain in profit from raising the price by one more penny would be more than offset by the loss of volume it would cause. Hence the monopoly price is not the "highest" price that can be got, but simply the most profitable one; higher prices can almost always be charged, but it is irrational to do so if the profit drain from the loss in volume more than offsets the profit gain from the higher per-unit price.
MONOPOLY PROFITS--Returns over and above a normal or competitive rate (see Normal Profit). Roughly synonymous terms are "excess profit" and "economic profit." In economics, the term "costs" (see Costs) includes a normal or competitive return on the entrepreneur's investment (and compensation for his services), with any additional profits above that level being by definition excess or supracompetitive returns.
MONOPSONY--A market with only a single buyer, the buying-side counterpart of Monopoly (a single firm on the selling side). Just as the monopolist finds it profitable to restrict output below the competitive level in order to raise the price it can charge to supracompetitive heights, so the monopsonist finds it profitable to restrict its purchases--to buy fewer units than would have been purchased by a group of competing buyers under similar conditions--and thereby depress the price it has to pay below the competitive level, i.e., below that which a group of competing buyers would have offered.
NONCOMPETITIVE PRICE--A price that exceeds that which the natural forces of competition would have established in a fully competitive market. See Competitive Price and Monopoly Price.
NORMAL PROFIT--In general, a rate of profit that is sufficient, but just sufficient, to induce the firms in an industry to continue producing and offering the product in question. A lower rate would cause some of the established firms to leave, a higher one would cause new firms to enter. See Condition of Entry. A normal profit is also one that, in the absence of entry barriers, would be ultimately established in an industry by the normal forces of competition, e.g., 8% after taxes on invested capital. If there are no barriers, new firms are expected to continue entering and expanding output until prices and profits fall to the competitive norm. Should too many enter and their "excess" output force prices and profits below that competitive level, exists would start and continue until those norms were restored.
OLIGOPOLY--A market structure characterized by "fewness" of sellers, as distinguished from Atomism ("many" sellers) and Monopoly (a single seller). Given a situation in which there are only a few sellers, a phenomenon called "oligopolistic interdependence" is expected. Whereas the individual firm in an atomistic industry has such a small share of aggregate industry sales that nothing it can do will perceptibly influence the overall marketwide price (e.g., the withdrawal of its entire supply from the market would not affect that market price), the individual firm in an oligopolistic industry is, by definition, sufficiently large that any substantial change in its output volume will have a perceptible effect on the overall market-wide price--and hence on the volume of sales, and price received, by each of its rivals. The latter are thus expected to notice these changes, recognize their source, and take appropriate measures to protect their respective interests.
A price decrease, for example, will normally prove unprofitable for the price-cutter. The others will promptly match his lower price, thus removing any incentive for buyers to switch suppliers. With his market share unchanged, but price now at a lower level, the price-cutter's profits are presumably lower than before. Similarly, a failure to go along with a price increase will generally prove unprofitable, since the others will quickly drop back to protect their market share if there's a holdout still selling at the lower price, the result being that the holdout gets no increase in his market share and foregoes a higher per-unit price that all could have had if he had gone along with the change. By a series of such adjustments, rational oligopolists are expected to eventually arrive at the price level that will maximize their joint profits, i.e., the industry's profit-maximizing price level, the same price as that a single-firm monopolist would charge.
The possibility of this result actually being reached is dependent on other factors, however, particularly on (1) whether the industry in question belongs to the Tight Knit or Loose subcategory of oligopoly, that is, whether its concentration ratio is very high or only moderate, and on (2) whether its entry barriers are high enough to permit the exercise of that pricing power without inducing new entry. See Barriers to Entry.
OPPORTUNITY COSTS--The amount that a given resource (e.g., dollar of capital) could have earned in its next best employment. For example, if savings banks are paying 5% interest on deposited funds, then, in calculating the total "cost" of using those funds for any purpose, the owner must include that 5% in foregone interest. As an amount that he would have received had he not elected to use the money for this other purpose, it is one of the true "costs" of that project.
OPTIMUM SIZE--That particular size of plant or firm that permits production and sale at the lowest possible real cost (in dollars of capital and man-hours of labor), given the existing state of technology. See Economies of Scale.
PERFORMANCE--The ultimate economic results that are said to be produced by the conduct patterns prevailing in an industry. Those end results are of four general types: (1) "Efficiency" in production and selling (firms and plants of optimum or minimum-cost scale, no excess capacity, no excess selling or promotional costs, no monopoly profits); (2) technological "progressiveness" (no suppression of new inventions and innovations); (3) economic "stability" (maximum employment of labor and plant capacity without inflation); and (4) economic justice or "equity" in the distribution of income (competitive returns to labor, capital, etc.). See also Structure and Conduct.
POTENTIAL COMPETITION--Additional firms that are expected to enter the market in question under certain circumstances, e.g., those that would be expected to appear if established firms in an oligopolistic market raised their prices above the competitive and entry-forestalling levels, thus making actual entry profitable for those outsiders. A large part of the competitive significance of potential competition is that the presence of firms known to be considering entry causes the established firms to keep their prices lower than they would have otherwise been kept in order to forestall actual entry by those firms and thus prevent the enlarged capacity (and still lower prices) their entry would be expected to bring. A lessening of this potential competition (as by certain kinds of mergers) thus implies higher prices. See Condition of Entry.
PRODUCT DIFFERENTIATION--The distinguishing of substitute products from one another by advertising and the like. Whereas buyers of a homogeneous product regard the output of any particular seller as identical in all respects to that of all other producers of that product, the seller of a "differentiated" product enjoys a favored position over its rivals, in that the buyers consider it a superior product and are willing to pay a "premium" price for it rather than accept the substitutes offered by those rivals. Since new entrants must frequently accept a lower price than established firms are able to get for a product of equal quality and cost, this disadvantage is said to constitute a "barrier to entry," one that permits established firms to charge a supracompetitive price without attracting new entry. See Condition of Entry.
PRODUCT HOMOGENEITY--A market situation in which the buyers of a product consider the output of producer X identical in all respects to that of producer Y, and hence will not consent to pay even a penny more in order to get the one rather than the other. In general, this situation is relatively common in the markets for industrial products, those that are virtually "fungible" (e.g., steel, cement, etc.) and are purchased by expert commercial buyers capable of evaluating with considerable accuracy any claimed differences. The opposite situation, Product Differentiation, is more common in consumer markets; there, the buyer (consumer), being relatively uninformed and generally unable to inform himself as to the relative merits of complex products, can often be persuaded that the identical products of firms X and Y are in fact "different," or that a featured difference is "worth" more than it actually cost, a situation that permits the exercise of monopoly power.
PROFIT-MAXIMIZING PRICE--The price that yields the seller the largest net profit (revenue minus costs), i.e., the most profitable combination of price, cost, and volume. See generally Monopoly Price.
PROFIT MAXIMIZATION--The principle of adjusting price and/or output volume in such a way as to earn the largest possible profits. This is said to be accomplished by continuing to increase production up to the point where the cost of the last unit of output (see Marginal Cost) just equals the additional revenue received by the firm from selling that additional unit of output (Marginal Revenue). This is the profit maximizing output since (a) profits would be reduced by producing still another unit (the extra cost would exceed the extra revenue) and (b) profits would similarly be reduced by failing to produce that last unit (the extra cost is slightly less than the extra revenue).
RELEVANT MARKET--The area in which the sellers of a product and its close substitutes compete for the patronage of a common group of buyers. See Market.
SECULAR CHANGE--A movement over time.
SHORT RUN--A period of time that permits an increase or decrease in current production volume with existing capacity, but one that is too short to permit enlargement of that capacity itself (e.g., the building of new plants, training of additional workers, etc.). See Long Run.
STATIC-EQUILIBRIUM--A theoretical position of "rest" in a market, as the price mechanism momentarily brings supply and demand into balance at some specific price-volume combination. It is an equilibrium position in the sense that any other combination would unbalance supply and demand (create either a shortage or a scarcity) and hence set in motion self-correcting forces. It is a static position in that it refers to a "frozen" instant in time, the theoretical moment in which supply and demand are supposedly in exact equality; in the real world, of course, supply and demand are in a constant state of flux, with only a general "tendency" or movement toward, not actual realization, of an equilibrium position.
STRUCTURE--The environmental or institutional features of a market that condition or influence the kind of behavior or conduct that the individual firms in it must follow in order to maximize their profits. The most significant of these structural features are said to be a market's Concentration (number and size distribution of firms) and its Condition of Entry.
SUBSTITUTE PRODUCTS--Products that are "reasonably interchangeable" with each other in buyers' eyes. If two products are sufficiently "close" substitutes that changes in the price of one cause substantial changes in the volume of sales of the other, they are said to belong in the same Relevant Market. If, however, they are only "remote" substitutes, i.e., if a change in the price of one has little or no effect on the other's sales volume, then they are in different markets. See Cross Elasticity of Demand.
TIGHT-KNIT OLIGOPOLY--A market structure so highly concentrated that prices are expected to be significantly above, and output significantly below, the competitive norm. In general, empirical studies suggest that this result is to be expected when the four largest sellers have 50% or more of the sales in a market or when the eight largest have 70% or more. See Oligopoly.
VARIABLE COSTS--Total costs, less all "fixed" or overhead costs (see Fixed Costs). Variable costs are those that "vary" with the volume of output (e.g., labor hours and raw material), increasing as production rises, decreasing as production volume contracts. Because of their relationship to output volume, they are subject to the day-to-day control of the firm, whereas fixed or overhead costs remain constant in the short-run. (In the long-run, however, all costs are "variable"_the firm can "vary" even its major production facilities, either expanding by building new plants or, at the other extreme, going out of business entirely.)