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April 18, 2014 

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KINKED-DEMAND CURVE ANALYSIS: An analysis that seeks to explain rigid oligopolistic prices using the kinked-demand curve. The kinked demand curve contains two distinct segments, one for higher prices that is more elastic and one for lower prices that is less elastic. The corresponding marginal revenue curve contains a vertical segment at the existing or initial quantity. Because a profit-maximizing oligopolistic firm equates marginal cost to marginal revenue, marginal cost also can take on a range of values at the existing quantity. In other words, marginal cost can increase or decrease without inducing a profit-maximizing oligopolistic firm to change price or quantity.

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TOTAL FIXED COST:

Cost of production that does NOT change with changes in the quantity of output produced by a firm in the short run. Total fixed cost is one part of total cost. The other is total variable cost. At any and all levels of output, fixed cost is the same. It includes cost that is not dependent on, or is unrelated to, production. The best way to identify fixed cost is to produce zero output. Fixed cost is incurred whether or not any output is produced. A cost measure directly related to total fixed cost is average fixed cost.
Total fixed cost is the opportunity cost incurred in the short-run production that does not depend on the quantity of output. As the name clearly implies, total fixed cost is fixed. A firm can produce a little output or a lot, increase or decrease production, or even stop producing altogether, but fixed cost remains unchanged.

Fixed cost must be paid as long as a firm is in business in the short run. The only way to avoid fixed cost is to get out of the business, which involves selling off all capital, and thus causing the quantity of fixed inputs to drop to zero (no capital, no business). However, in so doing, the firm is no longer operating in the short run, because all inputs have become variable.

Fixed Inputs

Total fixed cost is usually, not always but usually, associated with inputs that are fixed in the short run. For example, The Wacky Willy Company operates in the short run with labor (the workers) as a variable input and capital (the factory building and equipment) as a fixed input. The cost associated with the capital is a key component of total fixed cost. This fixed cost includes rental payments for the use of the building and interest payments on funds borrowed to purchase the capital equipment.

Other fixed cost, however, might not be directly associated with short-run fixed inputs. For example, administrative salaries, such as that paid to the President of The Wacky Willy Company (William J. Wackowski), are incurred whether The Wacky Willy Company produces 1 Stuffed Amigo or 1 billion Stuffed Amigos.

The Cost of Stuffed Amigos

Total Fixed Cost
Total Fixed Cost
The table to the right summarizes the total fixed cost of producing Wacky Willy Stuffed Amigos. The left-hand column is the quantity of Stuffed Amigos that come off the assembly line each minute, ranging from 0 to 10. For reference, the right-hand column is the total cost of producing Stuffed Amigos, the combination of total fixed and total variable cost.

The center column is the total fixed cost of producing each quantity, which is exactly $3 for each and every quantity of output. This is the essence of fixed cost. If 4 Stuffed Amigos are produced, then the total fixed cost incurred in their production is $3. The production of 9 Stuffed Amigos also incurs a total fixed cost of $3. Total fixed cost is fixed, it does not change with the quantity.

  • The most obvious point is that total fixed cost does NOT change with production. Producing more Stuffed Amigos does not affect total fixed cost. As a matter of fact, this is the only point that needs to be noted about total fixed cost, it is fixed. Total fixed cost does NOT change.

The Total Fixed Cost Curve

Total Fixed Cost Curve
Total Fixed Cost Curve
The total fixed cost curve graphically represents the relation between total fixed cost incurred by a firm in the short-run production of a good or service and the quantity produced. Because total fixed cost is fixed, the total fixed cost curve is a horizontal line.

The total fixed cost curve (TFC) for Wacky Willy Stuffed Amigos production is illustrated in the graph to the right. The distinguishing characteristic of this curve is that it is a horizontal line. Total fixed cost is $3 for zero production and it remains $3 for every level of production, no more and no less.

Average Fixed Cost

Total fixed cost can be used to derive a related fixed cost concept--average fixed cost. Average fixed cost is simply fixed cost per unit of output, which can be found by dividing total fixed cost by the quantity of output. If, for example, total fixed cost is $3 and the quantity of output produced is 10 Stuffed Amigos, then average fixed cost, that is the fixed cost per unit produced, is $0.30 (= $3/10).

The connection between total fixed cost and average fixed cost is mathematically represented by this equation:

average fixed cost=total fixed cost
quantity of output

A Variable Alternative

Total fixed cost is one of two components of total cost. The other is total variable cost. Total variable cost is the opportunity cost incurred in the short-run production by a firm that DOES depend on the quantity of output. If more output is produced, then total variable cost is greater. If less is produced, then total variable cost declines. If no output is produced, then total variable cost is zero.

Total variable cost is closely connected to the use of variable inputs. This means that total variable cost is guided by the law of diminishing marginal returns. As the productivity of the variable inputs change, then so too does variable cost. The relation is best reflected in marginal cost.

The connection between total cost, total fixed cost, and total variable cost is often summarized in this handy equation:

total cost=total fixed cost + total variable cost

<= TOTAL FACTOR COST, PERFECT COMPETITIONTOTAL FIXED COST CURVE =>


Recommended Citation:

TOTAL FIXED COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: April 18, 2014].


Check Out These Related Terms...

     | fixed cost | total fixed cost curve | average fixed cost | average fixed cost curve | total cost | total cost curve | variable cost | total variable cost | total variable cost curve | average cost | average fixed cost | marginal cost |


Or For A Little Background...

     | opportunity cost | fixed input | production inputs | production | production cost | business | factors of production | microeconomics | short-run production analysis | law of diminishing marginal returns | marginal returns | marginal analysis |


And For Further Study...

     | average total cost | average variable cost | total cost and marginal cost | total cost curves | total variable cost and total product | legal business organizations | firm objectives | opportunity cost, production possibilities | profit | normal profit | profit maximization |


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