<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Analyze short-run costs as influenced by total cost, fixed cost, variable cost, marginal cost, and average cost.
  • Calculate average profit
  • Evaluate patterns of costs to determine potential profit

The cost of producing a firm’s output depends on how much labor and physical capital the firm uses. A list of the costs involved in producing cars will look very different from the costs involved in producing computer software or haircuts or fast-food meals. However, the cost structure of all firms can be broken down into some common underlying patterns. When a firm looks at its total costs of production in the short run, a useful starting point is to divide total costs into two categories: fixed costs that cannot be changed in the short run and variable costs that can be changed.

Fixed and variable costs

Fixed costs are expenditures that do not change regardless of the level of production, at least not in the short term. Whether you produce a lot or a little, the fixed costs are the same. One example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out. Fixed costs can take many other forms: for example, the cost of machinery or equipment to produce the product, research and development costs to develop new products, even an expense like advertising to popularize a brand name. The level of fixed costs varies according to the specific line of business: for instance, manufacturing computer chips requires an expensive factory, but a local moving and hauling business can get by with almost no fixed costs at all if it rents trucks by the day when needed.

Variable costs , on the other hand, are incurred in the act of producing—the more you produce, the greater the variable cost. Labor is treated as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials.

As a concrete example of fixed and variable costs, consider the barber shop called “The Clip Joint” shown in [link] . The data for output and costs are shown in [link] . The fixed costs of operating the barber shop, including the space and equipment, are $160 per day. The variable costs are the costs of hiring barbers, which in our example is $80 per barber each day. The first two columns of the table show the quantity of haircuts the barbershop can produce as it hires additional barbers. The third column shows the fixed costs, which do not change regardless of the level of production. The fourth column shows the variable costs at each level of output. These are calculated by taking the amount of labor hired and multiplying by the wage. For example, two barbers cost: 2 × $80 = $160. Adding together the fixed costs in the third column and the variable costs in the fourth column produces the total costs in the fifth column. So, for example, with two barbers the total cost is: $160 + $160 = $320.

Questions & Answers

what is optimal biomass
Sheikh Reply
biological approach in economics
What is the difference between pure monopoly and natural monopoly
Joseph Reply
what is price elasticity demand
Explain the law of demand
hello my name is Godwin David am an economics student
what's the opportunity cost for free goods?
what is the demand and supply of QD is equal to 4040 thousand
Prince Reply
uses and limitations of elasticity of demand concept
Elasticity of demand refers to the degree of responsiveness of quantities
grace Reply
Hi everyone
I need all the formula for elasticity of demand
Dogbeda Reply
%∆QD/%∆P formula for elasticity of demand
for that of income elasticity %∆QD / %∆I
and that of cross elasticity of demand %∆QDx / %∆Py
economics is a science which studies human behavior and it's alternative uses as means and scarce resources
Joycelyn Reply
given that following demand and supply equation
Issah Reply
factors affecting demand and supply
Francis Reply
consumer's chioce price substitute effect quality of product
Why is economics study as a human
Freda Reply
what is economics
hello How are you doing
Economics is a social science that studies human behavior as a relationship between ends and scarce means which has alternative uses.
what is a trade union
Mary Reply
function of trade union
function of trade union
different between demand and supply
Francis Reply
importance of demand
what is the demand and supply of Qd=40,000-6P Qs=14P-28,000 the equilibrium price
Rocky Reply
pls, show workings
yes work
what is economics by Adams smith
Diana Reply
economics by Adams Smith's
to earn wealth more and more
An inquiry to nature and causes of wealth to the nature
what are the poor performance of the monopolies
Thandolwethu Reply
it controls only price or production not both a same time

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?