Question

What is the difference between fixed costs and variable costs?

Short answer

Fixed costs are constant costs of production and independent of the level of output, whereas variable costs of production are not constant and do vary with the level of output produced.

Step-by-step solution

Step 1. Fixed costs

Fixed costs are the costs of production that do not change with the level of output produced. For example, interest on loans, rents on land, depreciation of capital, etc.

Step 2. Variable costs

Variable costs are the costs of production that do vary with the level of output produced. For example, input costs, packaging costs, inventory costs, wages, etc.

Step 3. Difference between fixed costs and variable costs

Fixed costs	Variable costs
Fixed costs are constant costs of production.	Variable costs are not constant costs of production.
Fixed costs are independent of the level of output.	Variable costs vary with the level of output.
Firms must incur some fixed costs at even zero level of output.	Firms have no variable costs of production at zero level of output.