Expalin the difference between variable and fixed costs

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DIFFERENCE BETWEEN VARIABLE AND FIXED COSTS

Fixed costs are costs which do not vary with the output level. They do not change whether the firm increases or decreases output. Examples of fixed costs include rent and interest payments on loans. In contrast, variable costs are costs which vary directly with the output level. In other words, variable costs increase when the output level increases, and vice versa.

Examples of variable costs include the costs of labour and materials. Summing fixed costs and variable costs yields total costs. It is important to note that although fixed costs do not vary with the output level, they may change due to other factors. For example, if banks raise interest rates, interest payments on loans which are a fixed cost will increase.

In the short run, a firm makes output decisions based on consideration of only variable costs. This is because fixed costs will be incurred regardless of the output level. If the total revenue is higher than the total variable cost, the firm will continue production.

However, if the total variable cost is higher than the total revenue, the firm will shut down production. In the long run, however, a firm makes output decisions based on consideration of both fixed costs and variable costs. This is because fixed costs will become variable in the long run. In the long run, there are no fixed costs as all costs are variable.

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