Fixed cost

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Definition

For a factor of production

A fixed cost is a cost that a firm incurs on a factor of production whose quantity is independent of the actual quantity of material produced. Fixed costs are generally paid at the outset and are hard to recoup. Examples of fixed cost include the cost of land (for instance, land for a factory or office) and the cost of machines and equipment. Fixed costs cannot be altered in the short run.

Fixed costs are opposite to variable costs.

Distinction between fixed and variable costs

The distinction between fixed and variable costs is not as sharp as might naively be expected.

Over the long run, fixed costs become variable too

Over the long run, fixed costs become variable, because it is possible to change the configuration of resources used in production. For instance, over the long run, existing land used can be sold, and new land can be bought or rented. The kind and quantity of machines used, and the people hired, can also be changed.

Fixed costs may not be that fixed once wear and tear is considered

For a number of fixed costs, repeated use causes wear and tear, thus making the cost more variable. For instance, a machine may have a lifetime of 100,000 uses. Thus, every use of the machine is loosely equivalent to incurring a cost of 1/100,000 of the original cost of the machine. (This assumes that the market price of the machine remains the same during production. Complications, such as the sunk cost fallacy, arise if the market price of the machine, or its longevity, keep changing with time).