Fixed and Variable factorsFixed and Variable factors

A firm has both fixed and A firm has both fixed and variable factors and, as a result variable factors and, as a result

it will have both fixed and it will have both fixed and variable costs. variable costs.

Fixed CostsFixed Costs

Variable costsVariable costs

The The fixed costsfixed costs are those costs that are those costs that remain the same regardless of remain the same regardless of

output.output.ExEx. Let us think of what some fixed . Let us think of what some fixed costs would be. Well, the rent that costs would be. Well, the rent that you pay each month- if you stay on you pay each month- if you stay on the property for 24hrs and 7days-the property for 24hrs and 7days-you will still pay the same rent as you will still pay the same rent as

though you were there for one day. though you were there for one day.

Variable costs on the other hand Variable costs on the other hand are those costs that vary as are those costs that vary as

output changes. Your electricity output changes. Your electricity and telephone expenses are and telephone expenses are

variable- if you use variable- if you use moremore, you , you

will pay will pay moremore if you use if you use less less, , you will pay you will pay less.less.

Example:Example:Johnny Jones operates a furniture Johnny Jones operates a furniture store on east street, specialising in store on east street, specialising in making chairs, his opening hours making chairs, his opening hours

each day is from Monday –each day is from Monday –Saturday 9am-5pm. Mr. Jones Saturday 9am-5pm. Mr. Jones

rented the premises for $10,000 rented the premises for $10,000 per month, he employs 3 persons per month, he employs 3 persons paying them $5 an hour. Mr. Jones paying them $5 an hour. Mr. Jones

made 600 chairs in September. made 600 chairs in September. Calculate Mr. Jones’ costs for the Calculate Mr. Jones’ costs for the

month.month.

Variable costs + Fixed Costs = Variable costs + Fixed Costs = Total Costs.Total Costs.

Let us now look at these costs Let us now look at these costs curves. curves.

Average Costs. Average Costs.

There are three main average There are three main average costs:costs:

Average Fixed Costs (AFC)Average Fixed Costs (AFC)Average Variable Costs (AVC) Average Variable Costs (AVC) Average Total Costs (ATC). Average Total Costs (ATC).

AFC = AFC =

Total Fixed CostTotal Fixed Cost     Output Output

AVC =AVC =

Total Variable CostTotal Variable Cost    Output Output

ATC =ATC =

Total CostTotal Cost    OutputOutput

Marginal Costs Marginal Costs this is also another cost that the this is also another cost that the

firm faces. It is the addition in firm faces. It is the addition in Total Costs as a result of an Total Costs as a result of an

addition in output. addition in output.

MC = MC = change in Total Costchange in Total Cost change in Output change in Output