![]() ![]() Whilst a fixed cost remains constant, variable costs change in line with output. So when output increases, these costs increase, and when output decreases, variables costs decrease.Īs we can see from the graph below, the variable cost is in stark contrast to fixed costs. We define variable cost by its relationship between output and cost. Examples of variable costs include: utilities, commission-based pay, raw materials, and transport costs.As output increases, variable costs increase, and when output declines, it declines.A variable cost is a cost that changes in line with output.Although its total costs will increase, the cost to make an additional hamburger decreases. So as McDonald’s makes more Big Macs, it is able to lower its marginal variable costs. In turn, it is able to negotiate a discount with its suppliers for key ingredients such as beef, lettuce, and buns. By contrast, if it makes 1,000 Big Macs, the variable cost will fall significantly as it benefits from economies of scale. If McDonald’s produces 1 Big Mac, it may cost $5 for the ingredients. ![]() For each one it produces, there are costs in the form of ingredients, such as the hamburger, bun, lettuce, gherkin, and other ingredients. For example, McDonald’s will have a variable cost it pays to produce each Big Mac. To explain, each additional good a business produces represents a variable cost. Equally, the fewer goods a business produces, the lower the cost. In other words, the more goods a business produces, the higher the variable cost. Paul Boyce Posted in Microeconomics > Production TheoryĪ variable cost is a cost that changes depending on how much a business produces. ![]()
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