Fixed Costs

… a core concept in Economic Analysis and Atlas102

Concept description

The Economist (reference below) defines fixed costs as production costs that do not change when the quantity of output produced changes, for instance, the cost of renting an office or factory space.

Wikipedia (reference below) notes that:

“Fixed costs are not permanently fixed; they will change over time, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, such as warehouse costs and the like that are fixed only over the time period of the lease. By definition, there are no fixed costs in the long run, because the long run is a sufficient period of time for all short-run fixed inputs to become variable.

“Investments in facilities, equipment, and the basic organization that can’t be significantly reduced in a short period of time are referred to as committed fixed costs. Discretionary fixed costs usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary costs are advertising, machine maintenance, and research & development expenditures. Discretionary fixed costs can be expensive. …

“In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the context. … In accounting terminology, fixed costs will broadly include almost all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production.”

Atlas topic, subject, and course

Producer Theory and Competition (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Sources

The Economist, Fixed costs, Economics A-Z, at http://www.economist.com/economics-a-to-z/f#node-21529600, accessed 7 May 2016.

Wikipedia, Fixed cost, https://en.wikipedia.org/wiki/Fixed_cost, accessed 1 June 2017.

Page created by: Ian Clark, last modified 1 June 2016.

Image: Wikipedia, Fixed cost, https://en.wikipedia.org/wiki/Fixed_cost, accessed 1 June 2017.