AP® Microeconomics · Unit 3 · Topic 3.2
Fixed Costs, Variable Costs, and Total Cost
Total cost is just fixed cost plus variable cost at each output level. Fixed cost stays the same no matter how much the firm produces, while variable cost rises with output.
A firm pays some bills no matter what. Rent, insurance, a lease on equipment — these are fixed costs, and they show up even at zero output. A bakery owes rent whether the ovens run all day or stay cold, because the landlord doesn't care how many loaves got baked. Variable costs are different: flour, sugar, hourly wages for bakers. Bake nothing, spend nothing on flour. Bake more, spend more. Add fixed cost and variable cost together at any output level and you get total cost — the full bill for running the firm at that level of production.
This split matters because it tells you which costs a firm can escape in the short run and which it can't. Shut down completely and variable cost drops to zero, but fixed cost is already spent or already owed — it's sunk in the short run, locked in regardless of the production decision. That's why total fixed cost never falls as output rises: it was never tied to output in the first place. Only average fixed cost, the fixed cost spread across each unit, shrinks as more units share the same rent bill.
This cost split is the foundation for everything that comes next in the unit. Marginal cost, the cost of producing one more unit, comes entirely from the variable side, since fixed cost never changes when output changes by one unit. Average total cost, average variable cost, and average fixed cost all get built by dividing these same totals by quantity. Once those curves exist, the firm can apply the marginal revenue equals marginal cost rule to find its best output level.
Key terms
- Fixed cost
- A cost that stays the same dollar amount at every output level, including zero.
- Variable cost
- A cost that changes with the quantity produced, rising as output rises.
- Total cost
- Fixed cost plus variable cost at a given output level.
- Average fixed cost
- Total fixed cost divided by quantity, which falls as output rises.
- Sunk cost
- A cost already committed that cannot be recovered by changing the production decision.
Watch it explained
- How it worksHow do fixed cost and variable cost stack into total cost at every output level?
- Worked exampleFind total cost at 0 through 4 units when fixed cost is 40 and variable cost runs 0, 30, 50, 80, 130.
- Going furtherWhat happens to the total cost curve when the rent goes up by 20 dollars?
- Common mistakeWhy doesn't total fixed cost fall as the firm produces more?
Check yourself
End of topic.