Fixed Costs Case Study

Why would a firm making losses continue to operate?

Graph 1: Fixed cost in the short run

(BBC, 2016)

Fixed costs are those costs that do not vary (independent) with quantity of output produced. It is the costs that remain constant in total when the level of activity changes for a specified time period. Fixed costs are costs which cannot be recovered by reducing or ceasing output. Even they produce nothing or shut down, they still have to pay this obligation. (Gwartney, J. D. 2009)

For instance, fixed costs are rent for premises, insurance, supervisors' salaries, leasing charges for cars.

Variable costs is the cost of an input whose quantity does rise when output goes up, when the firm requires to make or produce outputs, this cost will be occurred consequently. It can be reduced by reducing output. (William J. Baumol, Alan S Blender, 1997)

For example, variable costs are labor, production supplies, direct material, commissions, and so on.

Total cost is a sum up of market value of all resources used to produce a good or

This is demand pull inflation, in this case the real output (real GDP) increases. It is caused by continuing rises in aggregate demand. Generally, it occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money. The increase in money in the economy will increase demand for goods and services from D0 to D1. In the short run, businesses cannot significantly increase production and supply (S) remains constant. The economy’s equilibrium moves from point A to point B and prices will tend to rise, resulting in