Theory of the Firm - Explaining Variable Costs

In this short revision video we explain the concept of variable costs, give some applied examples and note the significance of variable cost to a business.

Examples of increases in variable costs:

1. Fuel prices - For businesses that rely on transportation, fuel prices can be a significant variable cost. Fluctuations in fuel prices can have a significant impact on their profitability. For example, if fuel prices increase, the variable cost of operating a fleet of delivery trucks or running a taxi company increases as well.
2. Raw materials - Many businesses require raw materials to produce their products. Changes in the cost of these materials can significantly affect the variable costs of production. For example, if a bakery uses wheat flour as a key ingredient, a sudden increase in wheat prices will increase the cost of producing baked goods.
3. Labour costs - The cost of labour can be a significant variable cost for many businesses. For example, in industries such as retail and hospitality, labour costs are often the biggest variable cost. Increases in the minimum wage or the cost of employee benefits can significantly impact a business's variable costs.