A2 Micro: Fixed and Variable Costs

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A2 Micro: Fixed and Variable Costs

  1. 1. Fixed and Variable Costs A2 Microeconomics Tutor2u
  2. 2. Fixed Costs Fixed costs do not change as output varies in the short run Fixed cost has to be paid, whatever the level of sales achieved The higher the level of fixed costs in a business, the higher must be the achieved output in order to break-even
  3. 3. Examples of Fixed Costs 1 2 3 4
  4. 4. Examples of Fixed Costs Consulting fees Rental Costs Marketing Budgets Research Projects
  5. 5. Examples of Fixed Costs Consulting fees Rental Costs Marketing Budgets Research Projects
  6. 6. Examples of Fixed Costs Consulting fees Rental Costs Marketing Budgets Research Projects
  7. 7. Examples of Fixed Costs Consulting fees Rental Costs Marketing Budgets Research Projects
  8. 8. Total fixed costs remain constant at each level of output in the short run Output Total Fixed Cost (£) 0 2000 50 2000 100 2000 150 2000 200 2000 250 2000 300 2000 350 2000 400 2000 Average Fixed Cost (£) Therefore .... Average fixed cost (AFC) will fall as output increases AFC = FC Q
  9. 9. Total fixed costs remain constant at each level of output in the short run Output Total Fixed Cost (£) Average Fixed Cost (£) Therefore .... Average fixed cost (AFC) will fall as output increases Cost TFC 0 2000 50 2000 40 100 2000 20 150 2000 200 2000 250 2000 300 2000 350 2000 400 2000 £2000 10 Output (Q) 5
  10. 10. Total fixed costs remain constant at each level of output in the short run Output Total Fixed Cost (£) Average Fixed Cost (£) Therefore .... Average fixed cost (AFC) will fall as output increases Cost TFC 0 2000 50 2000 40 100 2000 20 150 2000 13.3 200 2000 10 250 2000 8 300 2000 6.6 350 2000 5.7 400 2000 5 £2000 AFC Output (Q) As output expands in the short run, the overhead costs per unit will fall
  11. 11. Variable Costs Costs that relate directly to the production or sale of a product Increase in short run output will cause total variable cost to rise Average variable cost = total variable cost / output Variable cost determined by marginal cost of extra units
  12. 12. Examples of Variable Costs 1 2 3 4
  13. 13. Examples of Variable Costs Commission Bonuses Wage Costs Component parts Basic raw materials
  14. 14. Examples of Variable Costs Commission Bonuses Wage Costs Component parts Basic raw materials
  15. 15. Examples of Variable Costs Commission Bonuses Wage Costs Component parts Basic raw materials
  16. 16. Examples of Variable Costs Commission Bonuses Wage Costs Component parts Basic raw materials
  17. 17. Fixed or Variable Cost? You Decide! Salaries for (contracted) staff Providing mobile hardware for staff Cost of Cloud apps and other software Cost of running training schemes
  18. 18. Fixed or Variable Cost? You Decide! Salaries for (contracted) staff Providing mobile hardware for staff Cost of Cloud apps and other software Cost of running training schemes
  19. 19. Fixed or Variable Cost? You Decide! Salaries for (contracted) staff Providing mobile hardware for staff Cost of Cloud apps and other software Cost of running training schemes
  20. 20. Fixed or Variable Cost? You Decide! Salaries for (contracted) staff Providing mobile hardware for staff Cost of Cloud apps and other software Cost of running training schemes
  21. 21. Fixed or Variable Cost? You Decide! Salaries for (contracted) staff Providing mobile hardware for staff Cost of Cloud apps and other software Cost of running training schemes
  22. 22. Get help from fellow students, teachers and tutor2u on Twitter: #econ3 @tutor2u_econ

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