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Fixed Cost
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles
J Woelfel
(We recommend this as work of authority and you can order
it here)
Fixed costs are incurred in
the short run (the long run being defined as a period of time long enough
for all costs to be variable). Fixed
costs are those costs that are invariant to changes in the level of output.
For a firm, such costs include rent and payments on capital equipment.
Capital, as opposed to labor, is generally considered that fixed
factor of production in the short run.
Total fixed cost
(TFC) represents all payments to factors of production that are invariant
to changes in output. Average
fixed cost (AFC) equals total fixed cost divided by output.
As output increases, average fixed cost will continually decrease.
The figure below illustrates these concepts.
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