A2 Micro: Fixed and Variable Costs

1. Fixed and Variable Costs A2 Microeconomics Tutor2u

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. Examples of Fixed Costs 1 2 3 4

4. Examples of Fixed Costs Consulting fees Rental Costs Marketing Budgets Research Projects

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. 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. 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. 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. Examples of Variable Costs 1 2 3 4

13. Examples of Variable Costs Commission Bonuses Wage Costs Component parts Basic raw materials

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

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A2 Micro: Fixed and Variable Costs

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A2 Micro: Fixed and Variable Costs