The fixed cost of running a business refers to the cost of the business simply being in existence. These are costs that do not change regardless of the level of output the company produces. Examples of fixed costs are rent of office space, employee wages, property tax, heating and lighting, and most federal permits or licenses for which the company may have to pay a fixed annual fee.

To use the simple example of a lemonade stand, fixed costs would include a pitcher to hold the lemonade, ice to keep it cold, the stand or folding table itself, any advertising or signs, and possibly payments for the right to set up the stand on someone's property. All these things must be paid for whether or not any lemonade is actually sold, or even mixed. Things such as the lemons, sugar, and cups would be considered variable costs, because they are expenses that increase with the number of cups of lemonade that are sold.

The important thing to realize about fixed cost is that it ensures the company starts out losing money by default; that is, it must produce a certain minimum amount of profit-making output just to break even. Once the minimum limit established by the fixed cost has been overcome, the company can begin earning money.

As an alternative to increasing the level of production, a company can increase profits by lowering their fixed cost. This usually involves increasing efficiency or eliminating waste. For example, better building insulation can reduce heating and air conditioning costs. Moving to a smaller office building can mean paying less rent. Fewer wages can be paid out after installing a new machine that allows the business to run with fewer people.

Contrast with variable cost.

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