Encyclonomic WEB*pedia: FIXED COST

FIXED COST:
In general, cost that does not change with changes in the quantity of output produced. More specifically, fixed cost is combined with the adjectives "total" and "average" to indicate the overall level of fixed cost or the per unit fixed cost. Fixed cost is incurred whether of not any output is produced. The contrast to fixed cost is variable cost, cost which does change with the quantity produced.
Fixed cost is cost that does not depend on the quantity of output produced. In other words, the same fixed cost is incurred at any and all output levels. This means that total fixed cost is, in fact, FIXED. However, it also means that average fixed cost, or fixed cost per unit, declines as the output level increases. Spreading $100 over 1,000 units gives a lower per unit fixed cost than spreading $100 over 10 units.
Fixed Inputs
For a firm, fixed cost usually includes the cost of using fixed inputs, assorted resources that are held fixed in the short run, especially capital and land. However, in practice, fixed cost includes any and all cost that does not vary with the quantity of output. This also includes overhead cost, administrative salaries, loan repayment expenses, and even marketing costs.
For example, Waldo's TexMex Taco World operates in the short run with labor (the workers) as a variable input and capital (the restaurant and equipment) as a fixed input. As such, the cost associated with the capital input is likely to be fixed cost. This includes payments for the use of the restaurant building--rent if the building is not owned by Waldo's TexMex Taco World or interest payments if funds were borrowed to purchase the restaurant.
Other fixed cost, however, might not be directly associated with short-run fixed inputs. For example, administrative salaries, such as that to the President of Waldo's TexMex Taco World (Waldo Millbottom), are paid whether Waldo's TexMex Taco World produces 1 taco or 1 billion tacos. This cost is not, strictly speaking, associated with a fixed input, but it is a fixed cost.
Total and Average
The two most common manifestations of fixed cost are total fixed cost and average fixed cost.
Total Fixed Cost: This is the total amount of fixed cost incurred in the production of a good. It combines all fixed opportunity cost.

Average Fixed Cost: This is the per unit fixed cost, which is calculated by dividing total fixed cost by the quantity of output produced. Because total fixed cost is fixed, average fixed cost declines as quantity increases.
Or For A Little Background...
     | total fixed cost | average fixed cost | fixed input | resources | capital | land | labor | variable input | rent | production | opportunity cost |
And For Further Study...
     | 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 |
Recommended Citation:
     FIXED COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: April 7, 2025].