Final answer:
Fixed costs, such as a bakery's rent and equipment, remain constant regardless of production levels, whereas variable costs, like ingredients and labor, change with production volume. On a graph, fixed costs are horizontal, while variable costs slope upwards with increased production.
Step-by-step explanation:
Fixed cost and variable cost are distinct components of the total cost of production for a business. Fixed costs are those expenses that do not change with the level of output produced. This would include costs such as rent for a bakery or the purchase of large equipment. These remain constant regardless of how much the bakery produces. For example, at Tasty Bakery, two examples of fixed costs might be the monthly lease payment for the baking space and the cost of baking ovens.
In contrast, variable costs change directly with the level of production. These include expenses for ingredients and hourly wages for staff, which vary according to how much Tasty Bakery produces. For instance, the more pastries they bake, the more flour and sugar they will need, and if they have a large order, they might need to hire more temporary staff, thus increasing their variable costs.
When it comes to depicting these costs on graphs, fixed costs are shown as a horizontal line because they do not change with the quantity produced, whereas variable costs have a positive slope, reflecting the increase in costs as production increases.