| § The costs that remain constant irrespective of the level of output that is produced. Even if the level of production of a firm is zero, it must still pay its fixed costs.
§ As the firm increases production, the fixed costs do not increase but remain the same.
§ Examples of fixed costs are the cost associated with the maintenance of a building, factory or equipment and the rent that must be paid even if it shuts down its operations.
§ Fixed costs are also known as sunk, unavoidable, overhead or indirect costs. |
§ The costs that change with the level of output. They represent the cost of the variable inputs. As more of a good or service is produced, the variable costs increase.
§ Include payments for raw materials, power, labour services, water, etc.
§ Are also called direct costs, prime costs or avoidable costs.
§ These are the costs that the firm can avoid if it shuts down its operations.
§ In the long run, all inputs are variable, a firm can build another factory or sell the one it has. |