$8.00

$38.00

TABLE 7.8 Extended Cost Function for Producing

Widgets

Note that the marginal cost of the first unit of output is always the same as total cost.

Fixed and Variable Costs

We can decompose costs into fixed and variable costs. Fixed costs are the costs of the fixed inputs (e.g., capital).

Because fixed inputs do not change in the short run, fixed costs are expenditures that do not change regardless

of the level of production. Whether you produce a great deal or a little, the fixed costs are the same. One

example is the rent on a factory or a retail space. Once you sign the lease, the rent is the same regardless of

how much you produce, at least until the lease expires. Fixed costs can take many other forms: for example,

the cost of machinery or equipment to produce the product, research and development costs to develop new

products, even an expense like advertising to popularize a brand name. The amount of fixed costs varies
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