What distinguishes fixed costs from variable costs?

Fixed costs are characterized by their stability in the short run, meaning they remain constant regardless of the level of production. This includes costs such as rent, salaries of permanent staff, and insurance, which do not fluctuate based on how much output a company generates. Even if a company produces nothing, these costs still need to be covered.

In contrast, variable costs change in direct relation to production levels. For example, raw materials or direct labor may increase as production increases, which illustrates the opposite behavior to fixed costs. Understanding this distinction is crucial for businesses as it affects decision-making regarding pricing, production volume, and overall financial planning.