Fixed Costs
What is Fixed Costs?
Fixed Costs are costs that do not change with the level of output in the short run.
These include expenses like rent, insurance, or salaries for permanent staff that must be paid even if production is zero. Fixed costs are unavoidable in the short run regardless of output levels.
Fixed Costs: a worked example
A screen-printing shop signs a lease at $4,000 a month, leases a press for $1,500, and pays $500 for insurance, so total fixed cost is $6,000 every month. Blank shirts and ink add $9 per shirt. Print zero shirts and total cost is still $6,000. Print 500 shirts and total cost is $6,000 plus 500 times $9, which is $10,500. Print 1,500 shirts and total cost is $6,000 plus $13,500, which is $19,500. Average fixed cost tells the real story: $6,000 ÷ 500 = $12 per shirt, while $6,000 ÷ 1,500 = $4 per shirt. Total fixed cost never budged, yet fixed cost per shirt dropped by $8 once output tripled.
The mistake students make with fixed costs
The word fixed tempts students into claiming that fixed cost per unit stays the same, so they draw average fixed cost as a flat line. Only the total is flat. Average fixed cost equals total fixed cost divided by quantity, so it falls at every output level and approaches zero without ever touching it. A second version of the error smuggles fixed cost into marginal cost. Because the total fixed amount does not move when one more unit is made, it cancels out of the change in total cost and never appears in marginal cost.
Fixed Costs questions
Why does average fixed cost fall as output rises?
Average fixed cost equals total fixed cost divided by quantity, and the numerator never changes in the short run. Spreading a $6,000 lease over 200 units costs $30 per unit, while spreading the same $6,000 over 1,000 units costs $6 per unit. Producers call this spreading the overhead. The curve slopes downward across every quantity and never turns back upward.
Is rent always a fixed cost?
Rent counts as a fixed cost whenever a lease locks in the payment so it cannot move with output, which is the standard assumption on an AP exam. A firm renting extra warehouse space by the pallet as shipments grow is paying a variable cost, even though the line item is still labeled rent. Ask whether the payment changes when quantity changes rather than what the item is named.
Do fixed costs change a firm's profit-maximizing quantity?
Fixed costs leave the profit-maximizing quantity untouched in the short run, because that decision comes from comparing marginal revenue with marginal cost and neither one contains a fixed component. A $2,000 jump in insurance lowers profit by exactly $2,000 at every output level, so the best quantity stays put. Fixed costs influence whether the firm remains in the industry over time, not how much it produces today.
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