Definition
- Fixed costs
- Fixed costs are expenditures that do not change regardless of the level of production, because the fixed inputs behind them do not change in the short run.
- Not to be confused with: Variable costs
- Variable costs are the costs of the variable inputs, such as labour and raw materials, so they increase or decrease with output.
Example
Can you think of a cost a bakery must pay even in a month when it bakes nothing?
A bakery pays £2,000 a month in rent on its shop and £150 a month to insure its ovens. Both are fixed: bake no loaves at all and both bills still arrive. Flour costs 30p a loaf, so 1,000 loaves need £300 of flour and 2,000 loaves need £600. The flour is variable, and so are the extra paid hours the second thousand loaves take.
Test yourself
What is the difference between fixed costs and variable costs?
Fixed costs stay the same whatever the firm produces in the short run; variable costs move up and down with output.