2 Why is a sunk cost irrelevant to a firm’s current decisions? The long run is a time frame in which the quantities of all factors of production can be varied. That is, the long run is a period in which the firm can change its plant.

To increase output in the long run, a firm is able to choose whether to change its plant as well as whether to increase the quantity of labour it hires. Fashion First can decide whether to install some additional knitting machines, use a new type of machine, reorganise its management or hire more labour. An electric power utility can decide whether to install more generators. And an airport can decide whether to build more runways, terminals and traffic-control facilities.

Long-run decisions are not easily reversed. Once a plant decision is made, the firm must live with it for some time. To emphasise this fact, we call the past expenditure on a plant that has no resale value a sunk cost. A sunk cost is irrelevant to the firm’s current decisions.

The only costs that influence its current decisions are the short-run cost of changing the quantity of labour and the long-run cost of changing its plant.