Question

Distinguish between Fixed Costs and Variable Costs with examples.

Hint:

• Fixed cost = “F” for “Firm must pay”
• Variable cost = varies with volume
• Total Cost = Fixed Cost + Variable Cost

Answer 1

Concept: Costs of production are broadly classified into fixed costs and variable costs based on their behavior with change in output.
Fixed Costs:

• Costs that do not change with change in level of output.
• Must be paid even if production is zero.
• Remain constant in the short run.

Examples:

• Rent of factory building
• Salaries of permanent staff
• Insurance premium
• Depreciation of machinery

Variable Costs:

• Costs that change directly with change in output.
• Increase when production increases.
• Become zero when output is zero.

Examples:

• Cost of raw materials
• Wages of casual labor
• Electricity used in production
• Packaging cost

Key Differences: \[ \begin{array}{|c|c|c|} \hline
Basis &
Fixed Cost &
Variable Cost
\hline Relation with Output & Does not change & Changes with output
\hline At Zero Output & Exists & Zero
\hline Time Period & Short run concept & Short run concept
\hline Examples & Rent, Salary & Raw material, Wages
\hline \end{array} \]