Economic Definitions

1. Production Costs
What are they and how are they
classified?

2. Definitions
 Production Costs, the cost of labor and
capital used to produce something, is made
up of two components:
 Fixed Costs, costs that do not change.
 Variable Costs, costs that do change.
 Together, these two costs equate to a
producer’s Total Cost.

3. Fixed Costs
 Fixed Costs do not change.
 Even if a producer
decides to Shutdown,
make nothing for a time,
fixed costs are still
incurred.
 Examples:
 The Facility
 Equipment
Maintenance
 Compensation of
Essential Employees
 A producer cannot decide to
forgo these costs even if
they produce nothing for a
time.

4. Variable Costs
 Variable Costs do change.
 If a producer decides to
increase or decrease
production, the amount of
materials and labor, and
hence the cost of each,
would change.
 Examples:
 Raw Materials
 Utilities
 Compensation of Non-
essential Employees