Modern mechanised production techniques are typically highly capital intensive, involving
significant initial capital investment. Using such technologies at relatively low levels
of output can be relatively expensive, for whilst variable costs might be low, they would
be offset by high average fixed costs. Such specialised equipment only really becomes
profitable when working at full capacity (see also the key concept, ‘Balanced production’
and ‘indivisibilities’, referred to below).
Expenditure on research and development can be considered a fixed cost and can represent
a considerable investment, as with the large sums involved in developing a new
car engine or other car components, or the cost of developing and testing a new pharmaceutical
drug prior to commercial launch. The firm may therefore need to
subsequently sell relatively large volumes to achieve an acceptably low research and
development cost per unit. Advertising may also generally be considered a fixed cost and
to be effective on a national basis may involve considerable outlay. Again, to justify such
expenditure, the firm must sell relatively large volumes.