Total Fixed Costs (TFC) are business expenses that do not change based on how much a company produces. These costs must be paid even if the company produces zero units of output in the short run.
Common examples include:
- Rent for buildings or land
- Salaries for permanent employees
- Interest on loans
- Insurance payments
- Depreciation of machinery
Key characteristics:
- Costs remain constant regardless of production levels.
- They exist even when output is zero.
- Over a long period, all costs can become variable, but fixed costs are linked to long-term factors like capital and property.
Relationship with Average Fixed Cost (AFC):
- AFC is calculated as TFC divided by total quantity (Q).
- As production increases, AFC decreases because the fixed costs are spread over more units.
- As output becomes very large, AFC gets closer to zero.
Why they matter:
TFC represents the minimum cost a business must pay to stay open. Understanding these costs is essential for calculating the break-even point and deciding if a business should continue operating or shut down.