What this means is that as more is made, the output is lower, so your fixed costs go up, your variable costs go down. This means that it is more important to have a well-defined, consistent volume of output so that your production costs are fixed.
This is one of the primary problems with the old, rigid, rigid, rigid fixed costs of the past. You wouldn’t want to go to a restaurant and order a “small plate”, so you had to eat a “large plate”. And if you ordered a “large plate” and the server didn’t have one you didn’t get what you ordered, then they had to give you the wrong thing and charge you extra.
Total variable costs are based on a certain quantity of inputs. In the case of a restaurant, it’s that the food and the service have to be provided. In the case of a factory, it’s cost of inputs. Production is the output of the factory.
this is what happens when you change the total variable costs. Not only does the cost of producing a particular amount of food (which is usually a lot more than the price of the food) go up a lot, but the quantity supplied goes up as well. So instead of ordering a large plate, you order a small plate. You get exactly what you had ordered originally.
So to make this all make sense, let’s look at the total variable cost and the average variable cost. The total variable cost is the cost of the inputs, and the average variable cost is the cost of the outputs. So the total cost of production is the cost of inputs, and the average cost of production is the cost of outputs.
It’s important to realize that the change in the cost of inputs and outputs is due to changes in the volume of production. So if we have, say, 1,000 cars manufactured, and their production cost is $500 each, then the change in variable cost is $$500 x 1,000 = $500.If 1,000 cars are sold, then the change in the cost of inputs is $500 x 0.01 = $0.01.
This is a great example of a cost of production problem. To solve this problem, we would need to get rid of 0.01 car-per-hour. So one way to do this would be to make every automobile use a different fuel. But if it takes 5,000 cars to build our new car, and each one has 50,000 gallons of fuel, then we’re talking about a 50,000 gallon increase in variable costs.
When I first heard this concept I could not understand it because I thought it was one that would only apply to big companies. It turns out that there are big companies that are not really affected by this phenomenon, so it should only really be applied to those companies. The reason is because big companies are generally the ones that have the most powerful economies of scale.
Variable costs are a measure of the total cost of production, or the costs of every variable in a given item. Variable costs are usually higher in smaller items, because there are more variables that need to be controlled in a smaller item.
The general idea here is that if a company is able to hire skilled labor, then the total variable costs will rise in direct proportion to the number of workers hired, and thus the rate of labor productivity will go up. This is because the more skilled people the company has, the more the cost of labor will go down.
