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A rise in fixed costs versus a rise in variable costs

Covers AS91400

Why this comparison is examined so often

It is the cleanest test in the whole standard of whether a candidate really understands marginal analysis, because the two cases have identical-looking causes and opposite effects on output.
The 2025 paper built an entire question on it.

A rise in fixed costs

A fixed cost is independent of output. It does not change the cost of producing one more unit.
Therefore MC does not move at all.
Only AC shifts up, to AC₁.

Consequences

The profit maximising output is where MR = MC. Neither MR (the market price line) nor MC has moved.
Output is unchanged.
Only profit falls, because AC is higher at that same output. The profit rectangle is shorter but the same width.

A rise in variable costs

A variable cost does change with output, so it does change the cost of producing one more unit.
Therefore both MC and AC shift up, to MC₁ and AC₁.

Consequences

MC₁ crosses the price line sooner — further to the left.
Applying marginal analysis: at the original output Qe, MR < MC₁, so the firm is now making a marginal loss on those units and will decrease output to Q₁ where MR = MC₁.
Output falls, and profit falls too.

The comparison in one table

	Fixed costs rise	Variable costs rise
MC curve	Does not move	Shifts up to MC₁
AC curve	Shifts up to AC₁	Shifts up to AC₁
Short-run output	Unchanged	Falls
Short-run price	Unchanged (price taker)	Unchanged (price taker)
Short-run profit	Falls	Falls
Reason	MC unmoved, so MR = MC is at the same Q	MC₁ cuts MR sooner

The long run in both cases

In both cases AC has risen, so if the firm ends up making a loss, firms will exit because there are no barriers to exit.
Exit decreases market supply, which raises the market price, until the survivors make normal profit again at the minimum of AC₁.
So the long-run price is higher in both cases, and there are fewer firms in the industry.

Tips and Tricks

The one sentence that earns Merit here, quoted almost verbatim in the 2025 report: "Fixed costs are independent of output, so an increase in fixed costs does not affect marginal cost (the cost of producing one more unit). Therefore only the per unit cost, the AC curve, shifts up to AC₁. Because the MC curve has remained the same, the profit maximising output also remains unchanged at Qe = Q_FC (the firm is still operating at MC = MR)."

Learn the shape of that sentence: definition → consequence for MC → consequence for the diagram → consequence for output.

Draw the AC₁ shift as NOT parallel. A fixed sum spread over more units raises AC by less at high outputs. So AC₁ should converge slightly towards AC as output rises, and the minimum of AC₁ sits at a larger output than the minimum of AC. Markers notice.

Give examples that fit the context. In a farming question, council rates and insurance are fixed; fertiliser, fuel and casual labour are variable. Using an example from the resource material is a Merit-level move that the reports name explicitly.

Worked ExampleComparing the two cost increases

An illustrative perfectly competitive farm sells at a market price of $8.00 per unit and currently produces 12,000 units, where P = MC. Its average cost at that output is $6.50.

Scenario A — council rates rise, adding $9,000 per year to costs. Scenario B — fertiliser prices rise, adding $0.75 to the cost of every unit produced.

For each scenario, explain what happens to the farm's output and profit in the short run.

Step 1 — The starting position

Profit per unit = $8.00 −$ 6.50 = $1.50 Supernormal profit = $1.50 × 12,000 = $18,000

Step 2 — Scenario A: classify the cost

Council rates are payable whether the farm produces anything or not. They are a fixed cost.

Step 3 — Scenario A: what moves on the diagram

Because fixed costs are independent of output, they do not affect the cost of producing one more unit.

MC does not move.

Only AC shifts up to AC₁. At 12,000 units, average cost rises by:

$9,000 ÷ 12,000 = $0.75 per unit

So AC at that output becomes $6.50 +$ 0.75 = $7.25.

Step 4 — Scenario A: what happens to output

The profit maximising output is where MR = MC. The market price line has not moved, and MC has not moved, so the intersection is in exactly the same place.

Output is unchanged at 12,000 units.

Applying marginal analysis explicitly: at 12,000 units MR still equals MC, so there is no unit worth adding and none worth cutting.

Step 5 — Scenario A: what happens to profit

Profit per unit = $8.00 −$ 7.25 = $0.75 Supernormal profit = $0.75 × 12,000 = $9,000

Profit has fallen by exactly $9,000 — the whole of the rates increase. The rectangle is shorter but the same width.

Step 6 — Scenario B: classify the cost

Fertiliser is used in proportion to what is grown, so more output means more fertiliser. It is a variable cost.

Step 7 — Scenario B: what moves on the diagram

Because variable costs do change with output, they do change the cost of producing one more unit.

Both MC and AC shift up by $0.75, to MC₁ and AC₁.

Step 8 — Scenario B: what happens to output

At the original output of 12,000 units, MC has risen by $0.75 above the $8.00 price line.

MR < MC₁ — the firm is now making a marginal loss on the last units.

To profit maximise it will decrease output to Q₁, the point where MR = MC₁. As output falls, MC₁ falls back down its curve until it meets the $8.00 price line again.

Output falls below 12,000 units.

Step 9 — The comparison

	Scenario A (fixed)	Scenario B (variable)
MC	Unchanged	Shifts up
AC	Shifts up	Shifts up
Output	Unchanged at 12,000	Falls below 12,000
Profit	Falls by $9,000	Falls

The whole difference comes from one fact: a fixed cost does not change the cost of the next unit, so it cannot change a decision made at the margin.

A rise in fixed costs versus a rise in variable costs

Covers AS91400

Why this comparison is examined so often

It is the cleanest test in the whole standard of whether a candidate really understands marginal analysis, because the two cases have identical-looking causes and opposite effects on output.
The 2025 paper built an entire question on it.

A rise in fixed costs

A fixed cost is independent of output. It does not change the cost of producing one more unit.
Therefore MC does not move at all.
Only AC shifts up, to AC₁.

Consequences

The profit maximising output is where MR = MC. Neither MR (the market price line) nor MC has moved.
Output is unchanged.
Only profit falls, because AC is higher at that same output. The profit rectangle is shorter but the same width.

A rise in variable costs

A variable cost does change with output, so it does change the cost of producing one more unit.
Therefore both MC and AC shift up, to MC₁ and AC₁.

Consequences

MC₁ crosses the price line sooner — further to the left.
Applying marginal analysis: at the original output Qe, MR < MC₁, so the firm is now making a marginal loss on those units and will decrease output to Q₁ where MR = MC₁.
Output falls, and profit falls too.

The comparison in one table

	Fixed costs rise	Variable costs rise
MC curve	Does not move	Shifts up to MC₁
AC curve	Shifts up to AC₁	Shifts up to AC₁
Short-run output	Unchanged	Falls
Short-run price	Unchanged (price taker)	Unchanged (price taker)
Short-run profit	Falls	Falls
Reason	MC unmoved, so MR = MC is at the same Q	MC₁ cuts MR sooner

The long run in both cases

In both cases AC has risen, so if the firm ends up making a loss, firms will exit because there are no barriers to exit.
Exit decreases market supply, which raises the market price, until the survivors make normal profit again at the minimum of AC₁.
So the long-run price is higher in both cases, and there are fewer firms in the industry.

Tips and Tricks

Learn the shape of that sentence: definition → consequence for MC → consequence for the diagram → consequence for output.

Worked ExampleComparing the two cost increases

An illustrative perfectly competitive farm sells at a market price of $8.00 per unit and currently produces 12,000 units, where P = MC. Its average cost at that output is $6.50.

Scenario A — council rates rise, adding $9,000 per year to costs. Scenario B — fertiliser prices rise, adding $0.75 to the cost of every unit produced.

For each scenario, explain what happens to the farm's output and profit in the short run.

Step 1 — The starting position

Profit per unit = $8.00 −$ 6.50 = $1.50 Supernormal profit = $1.50 × 12,000 = $18,000

Step 2 — Scenario A: classify the cost

Council rates are payable whether the farm produces anything or not. They are a fixed cost.

Step 3 — Scenario A: what moves on the diagram

Because fixed costs are independent of output, they do not affect the cost of producing one more unit.

MC does not move.

Only AC shifts up to AC₁. At 12,000 units, average cost rises by:

$9,000 ÷ 12,000 = $0.75 per unit

So AC at that output becomes $6.50 +$ 0.75 = $7.25.

Step 4 — Scenario A: what happens to output

The profit maximising output is where MR = MC. The market price line has not moved, and MC has not moved, so the intersection is in exactly the same place.

Output is unchanged at 12,000 units.

Applying marginal analysis explicitly: at 12,000 units MR still equals MC, so there is no unit worth adding and none worth cutting.

Step 5 — Scenario A: what happens to profit

Profit per unit = $8.00 −$ 7.25 = $0.75 Supernormal profit = $0.75 × 12,000 = $9,000

Profit has fallen by exactly $9,000 — the whole of the rates increase. The rectangle is shorter but the same width.

Step 6 — Scenario B: classify the cost

Fertiliser is used in proportion to what is grown, so more output means more fertiliser. It is a variable cost.

Step 7 — Scenario B: what moves on the diagram

Because variable costs do change with output, they do change the cost of producing one more unit.

Both MC and AC shift up by $0.75, to MC₁ and AC₁.

Step 8 — Scenario B: what happens to output

At the original output of 12,000 units, MC has risen by $0.75 above the $8.00 price line.

MR < MC₁ — the firm is now making a marginal loss on the last units.

To profit maximise it will decrease output to Q₁, the point where MR = MC₁. As output falls, MC₁ falls back down its curve until it meets the $8.00 price line again.

Output falls below 12,000 units.

Step 9 — The comparison

	Scenario A (fixed)	Scenario B (variable)
MC	Unchanged	Shifts up
AC	Shifts up	Shifts up
Output	Unchanged at 12,000	Falls below 12,000
Profit	Falls by $9,000	Falls

The whole difference comes from one fact: a fixed cost does not change the cost of the next unit, so it cannot change a decision made at the margin.