Firms must select a mix of inputs that minimizes the total cost of producing a given quantity of output in order to solve the cost minimization optimization problem.
The final dollar spent on any given input should produce the same marginal physical product at the optimal choice.
The fact that both variable costs and fixed costs are a component of the total costs is a similarity between the two. The manner in which they alter with production is the primary distinction. By definition, fixed costs are unaffected by production levels in the short term because they are "fixed."
A manufacturing facility's annual lease, for instance, is a fixed cost because it is the same regardless of how many units are produced. Variable costs, on the other hand, fluctuate with production levels. Take into account the manufacturing facility's costs for labor and materials; the more is created, the more work and material are expected to be utilized underway.
The variable cost per unit is assumed to remain constant in the above calculation. Because the total fixed costs never change, fixed costs per unit decrease with output quantity in contrast to variable costs. However, the same constant fixed cost is distributed across a larger and larger quantity of output as production increases; consequently, the fixed cost decreases per unit.
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