Fixed and Variable factors

A firm has both fixed and variable factors and, as a result it will have both fixed and variable costs.

Fixed Costs Variable costs

The fixed costs are those costs that remain the same regardless of output. Ex. Let us think of what some fixed costs would be. Well, the rent that you pay each month- if you stay on the property for 24hrs and 7days- you will still pay the same rent as though you were there for one day.

Variable costs on the other hand are those costs that vary as output changes. Your electricity and telephone expenses are variable- if you use more, you will pay more ­ if you use less, you will pay less.

Example: Johnny Jones operates a furniture store on east street, specialising in making chairs, his opening hours each day is from Monday – Saturday 9am-5pm. Mr. Jones rented the premises for $10,000 per month, he employs 3 persons paying them $5 an hour. Mr. Jones made 600 chairs in September. Calculate Mr. Jones’ costs for the month.

Variable costs + Fixed Costs = Total Costs. Let us now look at these costs curves. Variable costs + Fixed Costs = Total Costs. Let us now look at these costs curves.

Average Costs.

There are three main average costs: Average Fixed Costs (AFC) Average Variable Costs (AVC) Average Total Costs (ATC).

AFC = Total Fixed Cost Output

AVC = Total Variable Cost Output

ATC = Total Cost Output

Marginal Costs this is also another cost that the firm faces. It is the addition in Total Costs as a result of an addition in output.

MC = change in Total Cost change in Output