Fixed costs and variable costs in your life

Good Evening FPO Readers,

This is a mini lesson in economics.  There are two types of costs, fixed and variable.  A fixed cost is one that remains the same independent of other variables.  A variable cost is a cost that changes based on a combination of variables.  Many bills and purchases in our life have a combination of fixed and variable costs.  A utility bill is a common example.  For any consumable, there is a fixed base account/delivery charge and a variable change based on the amount delivered.  This applies the same to a water, electricity, or natural gas bill.  The fixed cost must be overcome before any variable costs are encountered.

The important concept here is that it is easier to cut variable costs than it is to cut fixed costs.  However, the counter to this is that the price per unit consumed raises since the fixed cost becomes more of the dominant cost of the two.

A useful application of this principle would be a household that has both an electricity service and natural gas service.  The only device on the natural gas line is the hot water heater.  The fixed monthly cost is for delivery is $14 and the consumption by this house is low at approximately $8 per month average.  In this case, it is likely beneficial to switch to an electric water heater when the natural gas unit reaches the end of its life.  With a variable cost that would likely be $12 to $14 per month, the natural gas fixed cost is eliminated since hot water is now provided by the electric service, whose fixed costs are already covered.  Though an electric unit does not heat as fast, this should be an acceptable trade off since the hot water consumption was low enough to start.

About Steve @ FPO
Hello FPO readers, I have been writing on financial topics for about 12 years now, but I have only recently reignited the fire of publishing online. I have to say, its good to be back. I am an electrical engineer by trade who enjoys all topics engineering and financial. I started Financial Place Online (FPO) to create a value added financial news and education website that would provide a refreshing daily financial read. Financial Place Online websites are built around the principles of consumer empowerment, leveling the playing field, zero spam tolerance, and none of those annoying sidebar or banner ads. For us, it's all about enjoying a good read.

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