Glossary – Fixed Costs

Definition

Costs that are constant irrespective of the quantity of output produced. Fixed costs have to be paid even if production is zero.

Example

The monthly rent an ice cream seller needs to pay for his store is a fixed cost (at least in the short run). The rent has to be paid regardless of production volume or economic activity. 

Relevance

Fixed costs are an important aspect when it comes to making production decisions. Since per unit fixed costs sink as output increases, companies with higher fixed costs are more likely to produce more (and vice versa).
Furthermore, fixed costs should also be considered when a company is struggling. As long as the firm can pay at least part of those costs from its revenue (even if it is still operating at a loss) it may be reasonable to stay in the market, since fixed costs would still need to be paid if the firm went out of business.

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