Fixed cost and variable cost

Fixed cost and variable cost:

Fixed and variable cost is obliging in understanding the behavior of costs over various levels of output.

Meaning of Fixed and Variable factors and costs:

Fixed and variable factors are with reference to the short run production function.

Short run is a period of time over which some factors of production can’t be changed, and such factors are termed as fixed factors. The costs incurred on fixed factors are termed as fixed costs. The factors whose quantity can be modified in the short run are changeable factors, and the costs incurred on variable factors are termed as variable costs.

Fixed costs are those that are independent of output, i.e., they do not change with modifications in output. Such costs are ‘fixed’ amount that should be incurred by a firm in short run whether the output is small or big. Example, interest on capital invested, contractual rent, salaries to the permanent employees, insurance premier and some taxes.

Variable costs are such costs that are incurred on the employment of variable factors of production whose amount can be modified in short run. Therefore the total variable costs modify with the level of output. It mounts whenever output expands and falls whenever output contracts. Whenever output is nil, variable cost becomes zero. Such costs comprise payments like wages of labor used, prices of raw materials, fuel and power employed and the transport costs.

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