Fixed Cost vs Variable Cost: Cost Concepts
Costs behave differently when output changes. Knowing this splits costs into 'Avoidable' and 'Unavoidable'.
head-to-Head Comparison
| Basis | Fixed Cost (TFC) | Variable Cost (TVC) |
|---|---|---|
| Relation to Output | Independent of Output (Even at 0) | Directly varies with Output |
| Zero Output | Remains Positive | Becomes Zero |
| Per Unit Behavior | Decreases as output increases | Remains constant (normally) |
| Examples | Rent, Salaries, Insurance | Raw Material, Wages, Power |
The 'Long Run' Trap
In the Long Run, ALL factors are variable. There is NO Fixed Cost in the long run. Don't fall for a question asking for TFC in the long run (it's zero/undefined).
Common Ground (Similarities)
- Both sum up to Total Cost (TC).
- Both are relevant for Short Run analysis.
Test Your Understanding
Q1: Which cost curve is a Rectangular Hyperbola?
TFC
AFC ✅
TVC
MC
Explanation: Average Fixed Cost (AFC) declines continuously as output rises, forming a rectangular hyperbola.