It intersects the y-axis at the total fixed cost because fixed costs must be paid even when there is no production. The blue line, which represents the company's fixed costs, is horizontal because it is unaffected by output. The Fixed and Variable Costs graph below illustrates a business’s cost structure. In the long run, all fixed costs are variable. In an extreme case, a business may choose to close, and thus eliminate all of its fixed costs. Most fixed costs are time-related, such as annual salaries, or monthly rent. Advertising is generally considered a fixed cost because it is not tied to production, but a business may choose to reduce its overhead by advertising less. For example, insurance is a fixed cost, because the premium is normally not affected by the production level, but an insurance premium may change from one period to the next. ![]() To distinguish between fixed and variable costs ask yourself, “Will this cost increase if more of a good or service is provided?” If the answer is “No” then the cost is fixed. Examples of variable costs include raw materials and wages paid to hourly workers directly involved in the production of a good or service. Fixed costs are unaffected by output, while variable costs are directly related to output. Economists separate business costs into two categories: fixed and variable. Examples of fixed costs include rent, mortgage payments, telephone bills, and salaries of essential personnel.ĭo you have expenses that you are locked into? Perhaps rent, a phone bill, or an insurance premium? These are examples of your fixed costs. The insurance coverage amount may change based on the business's needs, but the premium amount will remain fixed.View FREE Lessons! Definition of Fixed Cost: Fixed costs are costs that are not directly influenced by how much of a good or service is produced. Insuranceįor example, a business that pays $1,000 monthly for liability insurance will have to pay that amount regardless of how much they produce or sell. For instance, if a business has salaried employees who earn $4,000 per month, they will be paid that amount even if the business experiences a slow month in terms of production. The amount of money a business pays its employees each month is typically fixed and does not change based on production or sales. For example, a retail store that pays $5,000 monthly rent will have to pay that amount whether they sell $10,000 or $100,000 worth of products monthly. ![]() Rent is a fixed cost that businesses must pay regardless of how much they produce or sell. Fixed Costs ExamplesĮxamples of fixed costs include rent, salaries, insurance and loan payments. Want to know how a firm makes profits after incurring all these costs? Read our article on Revenue vs Profit. Price Determination in a Competitive Market.Market Equilibrium Consumer and Producer Surplus. ![]()
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