​Because the cost of inputs influences efficient production decisions, a business must analyze costs before making its decisions.​

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​Measures of Cost

• Costs you can't change in the short run.

• ​The cost that a business incurs even if the plant is idle and output is zero.

• Sometimes called "Overhead"​

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Fixed Cost

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• ​Salaries paid to executives

• Interest charges on bonds

• Rent payments on leased properties

• Local and state property taxes.

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Examples of Fixed Costs​

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​Variable Costs

• ​Cost that changes when the business rate of operation or output changes.​

• Like in the Theory of Production, it mainly applies to labor costs.

• Also includes​ raw materials.

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Variable Cost Examples

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• ​Wage-earning workers may be laid off or worked overtime as output changes.

• ​Electric power to run the machines.

• ​Freight charges to ship the final product.

• The sum of the fixed and variable costs.​

• ​Total cost takes into account all the costs a business faces in the course of its operations.

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Total Costs​

• ​Fixed - Cost of the lot, ​pumps and tanks, and taxes and permits.

• Variable - ​Wages for employess, electricity and gas costs.

• The owner may operate the station 24 hours a day for a low cost.​

Costs of a Gas Station

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-Break-even point is the total output or total product the business needs to sell in order to cover its total costs.

​-A business wants to do more than break even, however. It wants to make as much profit as it can.

Break-Even point