Fixed costs (FC), also known as overhead costs, are expenses that do not change based on how much a business produces. These costs must be paid even if the company produces zero output.
Key characteristics:
- They remain constant in the short run.
- They exist even when production is zero.
- Common examples include rent, salaries for permanent staff, insurance premiums, and depreciation.
Relationship with production:
- In the short run, Total Cost = Fixed Costs + Variable Costs.
- Average Fixed Cost (AFC) is calculated as FC / Quantity. As production increases, the AFC decreases because the fixed cost is spread over more units.
Short-run vs. Long-run:
- In the long run, all costs are considered variable because businesses can change factors like building size or long-term contracts.
Visual Representation:
On a cost diagram, fixed costs are shown as a horizontal line, meaning they stay the same regardless of the level of output.