Variable costs and fixed costs in economics, are the two main types of costs that a company incurs when producing goods and services. Variable costs vary with the amount of output produced, and fixed costs remain the same no matter how much a company produces.

Variable cost --Variable costs are a company's costs that are associated with the number of goods or services it produces. A company's variable costs increase and decrease with its production volume. When production volume goes up, the variable costs will increase. On the other hand, if the volume goes down, so too will the variable costs.

You may calculate variable costs by multiplying the quantity of output by the variable cost per unit of output. This calculation is simple and does not take into account any other costs such as labor or raw materials.

Suppose company ABC produces ceramic mugs for a cost of $2 a mug. If the company produces 500 units, its variable cost will be $1,000. However, if the company does not produce any units, it will not have any variable costs for producing the mugs. Similarly, if the company produces 1000 units, the cost will rise to $2,000.Examples of variable costs may include labor, commission, packaging, and raw materials for production.

Fixed cost--

Unlike variable costs, a company's fixed costs do not vary with the volume of production. Fixed costs remain the same regardless of whether goods or services are produced or not. Thus, a company cannot avoid fixed costs.

Using the same example above, suppose company ABC has a fixed cost of $10,000 per month to rent the machine it uses to produce mugs. If the company does not produce any mugs for the month, it would still need to pay $10,000 for the cost of renting the machine. On the other hand, if it produces one million mugs, its fixed cost remains the same. The variable costs change from zero to $2 million in this example.

The most common examples of fixed costs include lease and rent payments, utilities, insurance, certain salaries, and interest payments.

Sunk Cost-- A sunk cost refers to money that has already been spent and which cannot be recovered. In business, the axiom that one has to "spend money to make money" is reflected in the phenomenon of the sunk cost. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs are excluded from future business decisions because the cost will remain the same regardless of the outcome of a decision.

Using the same example of Sunk Costs can be understand as-

Let's say you created a created advertisement banner of mugs and spent $5,000 on marketing and advertising to help spread the word about it to consumers. As a result, the marketing and advertising campaigns prove ineffective. Because you've already spent $5,000, this amount is considered the sunk cost.

If a sunk cost can be eliminated at some point, it becomes a relevant cost and should be a part of business decisions about future events.