Variable+Costs

Variable costs are costs encountered in the production of a product that are affected by the total output of the system. These costs are primarily for resources that will be used in the production or distribution of the product and, due to an increase in the system's output, will be needed in greater numbers as more of these resources are used in this greater amount of production.

These differ from fixed costs, costs such as rent for a building, in that the more that is produced, the more variable costs will increase (even in the short run), while fixed costs will always stay the same in the short run. The short run is defined as the time period in which variable costs can be changed but fixed costs cannot. Variable costs include things like the amount of labor being used to produce, whereas fixed costs are things like the cost of machinery or the cost of the building in which things are being produced. Variable costs change with the amount of output being produced. Firms can change the amount of transportation services they use in the short run based on their changing of the output of their system. This is because more transportation of their goods (a variable cost) is needed to distribute a larger amount of products to consumers.

media type="youtube" key="b4hzFjXhfF8" height="344" width="425" Here is a video explaining the relationship between variable costs and marginal costs.

Practice Problem: //Answer at bottom of page// Which of the following is a variable cost? a. cost of utilities (water, electric, etc.) b. Rent/mortgage c. cost of labor d. cost of entrepreneur's time (how much the entrepreneur would make elsewhere)

Links for further information on variable cost: [|Wikipedia]-Wkipedia gives an overview of variable costs. [|Street Authority]-This page (provided by street authority) gives a defintion for variable cost and examples, and explains why variable costs matter. [|Breakeven Analysis]-This site shows how businesses adjust their variable (and fixed) costs to make their businesses more profitable.

Answer to practice problem: c. cost of labor; cost of labor (or wages) is a variable cost becaus it can be changed duing the short run.