Adjustment costs

Definition of adjustment costs

This is the cost to a firm of altering its level of output.

For example, it may be desirable for a firm to cut down on its output, but doing this will create adjustment costs such as redundancy payments and lower staff morale. On reflection of its adjustment costs, it may be more desirable to keep producing at a sub-optimum level.

Similarly, a rapid expanse of output may create problems such as difficulties in negotiating a bigger place to rent and the difficulties in hiring more workers.

Impact of tariffs

Another example could be the effect of a new tariff. For example, a US tariff on steel imports would mean firms have to renegotiate contracts switching from imports to domestic production. This process is not without friction and will impost costs.

Impact of leaving single market

If the UK leaves the Single Market, firms will have adjustment costs in readjusting to new trade rules and different regulations.

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