Fixed Cost

Columns (2) and (3) of Table 7-1 break total cost into two components: total fixed cost (FC) and total variable cost (Ve).

Fixed Cost

Fixed Cost

The major elements of a firm’s costs are its fixed costs (which do not vary at all when output changes) and its variable costs (which increase as output increases). Total costs are equal to fixed plus variable cost~: TC = Fe + “C,

What are a firm’s fixed Costs? Sometimes called  overhead” or “sunk costs,” they consist of items such as rent for factory or office space, contractual payments for equipment, interest payments on debts, salaries of tenured faculty, and so forth. These nvnst
be paid even if the firm produces no output, and they do not change if output changes. For example, a law firm might have an office lease which runs 10 years and remains an obligation even if the firm shrinks to half its previous size. Because FC is the
amount that must be paid regardless of the level of output, it remains constant at $55 in column (2).

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