fixed costs

Examples of fixed costs in the following topics:

• Types of Costs

  • It consists of variable costs and fixed costs.
  • Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs .
  • However, fixed costs are not permanent.
  • Economic cost is the sum of all the variable and fixed costs (also called accounting cost) plus opportunity costs.
  • This graphs shows the relationship between fixed cost and variable cost.

• Costs and Production in the Short-Run

  • Fixed Cost (FC) is the quantity of the fixed input times the price of the fixed input.
  • FC is total fixed cost and may be referred to as TFC.
  • Average Fixed Cost (AFC) is the FC divided by the output or TP, Q, (remember Q=TP).
  • AFC is fixed cost per Q.
  • Remember that fixed cost do not change and therefore do not influence MC.

• Economic Costs

  • So, the economic cost of college is the accounting cost plus the opportunity cost.
  • Total cost (TC): total cost equals total fixed cost plus total variable costs (TC = TFC + TVC) .
  • Fixed cost (FC): the costs of the fixed assets (those that do not vary with production).
  • Average fixed cost (AFC): the fixed costs divided by output (AFC = TFC/q).
  • The average fixed cost function continuously declines as production increases.

• Natural Monopolies

  • The total cost of the natural monopoly is lower than the sum of the total costs of two firms producing the same quantity .
  • Natural monopolies tend to form in industries where there are high fixed costs.
  • A firm with high fixed costs requires a large number of customers in order to have a meaningful return on investment.
  • As it gains market share and increases its output, the fixed cost is divided among a larger number of customers.
  • For both of these, fixed costs of building the necessary infrastructure are high.

• Production Outputs

  • Fixed costs are those expenses that remain constant regardless of the amount of good that is produced.
  • Variable costs are only those expenses that are directly tied to the production of more units; fixed costs are not included.
  • If the manufacturer stopped production, it would sustain all the fixed costs as a loss.
  • The revenue gained from sales of these products do not offset variable and fixed costs.
  • If it does not produce goods, the firm suffers a loss due to fixed costs, but it does not incur any variable costs.

• Shut Down Case

  • If a firm decreased production it would still acquire variable costs not covered by revenue as well as fixed costs (costs inevitably incurred).
  • By stopping production the firm only loses the fixed costs .
  • If the revenue the firm is making is greater than the variable cost (R>VC) then the firm is covering it's variable costs and there is additional revenue to partially or entirely cover the fixed costs.
  • When a firm shuts down it still retains capital assets, but cannot leave the industry or avoid paying its fixed costs.
  • A firm that exits an industry does not earn any revenue, but is also does not incur fixed or variable costs.

• Average and Marginal Cost

  • Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
  • Marginal cost is not related to fixed costs.
  • It is also equal to the sum of average variable costs and average fixed costs.
  • When the average cost declines, the marginal cost is less than the average cost.
  • When the average cost increases, the marginal cost is greater than the average cost.

• Graphical Representations of Production and Cost Relationships

  • The average variable cost is simply the variable cost per unit of output (TP or Q):
  • The fixed cost is determined by the amount of the fixed input and its price.
  • In the short-run the fixed cost does not change.
  • As the output (Q) increases the average fixed cost (AFC) will decline.
  • The average total cost (ATC) is the total cost per unit of output.

• Short Run Firm Production Decision

  • The short run is the conceptual time period where at least one factor of production is fixed in amount while other factors are variable.
  • Fixed costs have no impact on a firm's short run decisions.
  • Instead, during a shutdown the firm is only paying the fixed costs.
  • When a firm is shut down in the short run, it still has to pay fixed costs and cannot leave the industry.
  • By exiting the industry, the firm earns no revenue but incurs no fixed or variable costs.

• Short Run and Long Run Costs

  • Long run costs have no fixed factors of production, while short run costs have fixed factors and variables that impact production.
  • In the long run there are no fixed factors of production.
  • Fixed costs have no impact of short run costs, only variable costs and revenues affect the short run production.
  • Examples of variable costs include employee wages and costs of raw materials.
  • The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run .