Post on 14-Nov-2014
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Fixed and Variable Costs
A2 MicroeconomicsTutor2u
Fixed Costs
Fixed costs do not change as output varies in the short run
Fixed cost has to be paid, whatever the level of sales achieved
The higher the level of fixed costs in a business, the higher must be the achieved output in order to break-even
Examples of Fixed Costs
1 2
3 4
Examples of Fixed Costs
Consulting fees Rental Costs
Marketing Budgets Research Projects
Examples of Fixed Costs
Consulting fees Rental Costs
Marketing Budgets Research Projects
3
Examples of Fixed Costs
Consulting fees Rental Costs
Marketing Budgets Research Projects
Examples of Fixed Costs
Consulting fees Rental Costs
Marketing Budgets Research Projects
Output Total Fixed Cost (£)
Average Fixed Cost (£)
0 2000
50 2000
100 2000
150 2000
200 2000
250 2000
300 2000
350 2000
400 2000
Total fixed costs remain constant at each level of output in the short run
Therefore .... Average fixed cost (AFC) will fall as output increases
AFC = FC Q
Output Total Fixed Cost (£)
Average Fixed Cost (£)
0 2000
50 2000 40
100 2000 20
150 2000
200 2000 10
250 2000
300 2000
350 2000
400 2000 5
Total fixed costs remain constant at each level of output in the short run
Therefore .... Average fixed cost (AFC) will fall as output increases
Output (Q)
Cost
TFC
£2000
Output Total Fixed Cost (£)
Average Fixed Cost (£)
0 2000
50 2000 40
100 2000 20
150 2000 13.3
200 2000 10
250 2000 8
300 2000 6.6
350 2000 5.7
400 2000 5
Total fixed costs remain constant at each level of output in the short run
Therefore .... Average fixed cost (AFC) will fall as output increases
Output (Q)
Cost
TFC
£2000
AFC
As output expands in the short run, the overhead costs per unit will fall
Variable CostsCosts that relate directly to the production or sale of a product
Increase in short run output will cause total variable cost to rise
Average variable cost = total variable cost / output
Variable cost determined by marginal cost of extra units
Examples of Variable Costs
1 2
3 4
Examples of Variable Costs
Commission Bonuses Wage Costs
Component parts Basic raw materials
Examples of Variable Costs
Commission Bonuses Wage Costs
Component parts Basic raw materials
Examples of Variable Costs
Commission Bonuses Wage Costs
Component parts Basic raw materials
Examples of Variable Costs
Commission Bonuses Wage Costs
Component parts Basic raw materials
Fixed or Variable Cost? You Decide!
Salaries for (contracted) staff
Providing mobile hardware for staff
Cost of Cloud apps and other software
Cost of running training schemes
Fixed or Variable Cost? You Decide!
Salaries for (contracted) staff
Providing mobile hardware for staff
Cost of Cloud apps and other software
Cost of running training schemes
Fixed
Fixed or Variable Cost? You Decide!
Salaries for (contracted) staff
Providing mobile hardware for staff
Cost of Cloud apps and other software
Cost of running training schemes
Fixed
Fixed
Fixed or Variable Cost? You Decide!
Salaries for (contracted) staff
Providing mobile hardware for staff
Cost of Cloud apps and other software
Cost of running training schemes
Fixed Variable
Fixed
Fixed or Variable Cost? You Decide!
Salaries for (contracted) staff
Providing mobile hardware for staff
Cost of Cloud apps and other software
Cost of running training schemes
Fixed Variable
Fixed Variable
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