Economics "Ask the Instructor" Clip 8 Transcript
What do we mean by fixed and variable costs?
Well, as the term suggests fixed costs are costs that stay the same as the firm varies the amount of output. For example, a farmer who has leased 100 acres of land can increase the amount of wheat by adding more fertilizer per acre, by irrigating, or perhaps by more intensive control of weeds. The rent paid on the land, though, remains the same, regardless of how much wheat is grown. In this case, the land is the fixed resource and the rent is the fixed cost. Or consider my fee that I’m being paid to write and present the answers to these questions. The fee is the same whether the publisher sells 1,000, 10,000, or 100,000 copies of the textbook. To the publisher, my fee is, therefore, a fixed cost. Or consider your professor’s salary. To the university, it too is a fixed cost because your professor’s salary remains the same whether there are 20, 50, or 300 students enrolled in your class.
In contrast, variable costs are costs that change with changes in output. In the agricultural example, fertilizer is clearly a variable cost. In the classroom example, your professor’s salary is a fixed cost in the context of your particular section of economics. However, if the number of students wanting to take economics courses increases, assuming that the university has sufficient time to add several new sections of economics, it would be necessary to hire additional teachers. In this case faculty salaries would be a variable cost. Finally, consider how your college finances athletic events. Are students assessed a single athletic fee that permits them to attend all games? If so, the ticket cost of attending a game is a fixed cost, not a function of how many games you attend. On the other hand your school may require students to buy a ticket each time they attend a game. In that case, the cost of attending each game is a variable cost.
Costs that are properly viewed as fixed in the shortrun become variable in the longrun. In fact, the shortrun is typically defined as a period of time short enough in which at least one input cannot be varied. The longrun, on the other hand, is defined as a period of sufficient time so that all inputs can be changed. In the case of the agricultural example, land was viewed as a fixed resource, and therefore, we were in the shortrun. In the longrun, the quantity of land that the farmer can buy can be altered and so it is a variable cost. In fact, the essential difference between the short and long run is that in the short run, something is fixed and the costs associated with that fixity are called fixed costs. In the longrun, everything is variable and the costs, therefore, are called variable costs.