Short Run Cost Curves
Total Cost Curves :
Total cost refers to total expenditure incurred by the firm in producing any given quantity of output.
Two main types are:
1. Total Fixed Cost (TFC) :
It refers to the cost incurred by the firm on the use of all fixed factors.
- TFC is independent of output i.e. it does not change with the change in the quantity of output. It remains constant.
- It includes — interest on the capital invested, rent, insurance premium, property tax, wages and salaries of permanent employees.
- TFC is the fixed obligation, even if nothing is produced, fixed cost has to be incurred. So it is known as unavoidable cost or supplementary cost or overhead cost.
2. Total Variable Cost (TVC) :
It refers to the total cost incurred by a firm on the use of the variable factors.
- TVC varies with the level of output. If vary directly with the change in the volume of output i.e. TVC rises as more output is produced and falls as less is produced.
- It includes — payment for raw materials, wages paid to temporary and casual workers, payment for fuel and power, expenses incurred on transportation.
- Variable cost is not incurred if nothing is produced, so it is also called as avoidable cost or prime cost or direct cost.
3. Total Cost (TC) :
Total cost is the cost incurred on the use of all types of input — fixed and variable, in producing a given amount of output.
- Total cost is sum total of TVC and TFC
TC = TFC + TVC
- Since Total cost has total variable cost as one of its components which varies with change in output, the total cost will change directly with the change in output.
- The changes in total cost entirely due to changes in total cost.
Short Run Total Cost Curves:
- Total Fixed Cost Curves (TFC curves) :
- Total fixed Cost curve (TFC) curve is a straight line parallel to horizontal axis (X — axis) , indicating a same amount of total fixed cost at every level of output.
- TFC curve starts from a point A on vertical axis (Y- axis), indicating that total fixed cost will be incurred even if the output is zero.
2. Total Variable Cost (TVC) curve:
- Total variable cost curve is “inverted S — shaped” which is initially concave downward indicating that total variable cost increased at decreasing rate and subsequently it is concave upward indicating that TVC increases at an increasing rate.
- TVC curve behave like this (inverted S- shape) — because this follows directly from “ law of variable proportion”.
- Total Variable cost initially increases at a diminishing rate due to increasing returns to the variable factor because of fuller utilisation of fixed factor and greater specialisation.
- Total Variable cost later increases at an increasing rate due to diminishing returns to the variable factor arising from difficulty of management and over utilisation of fixed factor.
3. Total Cost Curve (TC curve) :
Total cost is the sum of total variable cost and total fixed cost. Thus TC curve is obtained by vertical summation of TFC curve and TVC curve.
- The slope of TC curve is identical and parallel to that of TVC curve because a constant fixed cost is added to the total variable cost, so the shape of TC curve is same as TVC curve.
- TVC curve originate from point of origin but TC curve originate from a point of intersection on vertical axis (y — axis) indicating that at zero level of output total cost is not zero but equals to total fixed cost.
- The total curve initially increases at a decreasing rate and then at increasing rate. Means TC curve is concave downward first, then becomes concave upward. This is because TC curve follows directly from the law of variable proportion.
Relationship between TFC, TVC and TC curves :
1. TFC curve parallel to x — axis and remain constant.
2. TC curve initially increases with decreasing rate and then increases with increasing rate. Similarly TVC curve also increases with decreasing rate first and then with increasing rate.
3. TVC curve and TC curve never touches to each other but remain parallel to each other because
TC — TVC = TFC
and TFC curve never become zero at any level of output.
4. TVC originate from point of origin as total variable cost is zero at initial level.
5. TC curve originate from a point A on y axis because at zero level of output total cost is equal to total fixed cost.
6. The slope of TC and TVC is “inverted S — shaped” this is because it follows directly from the law of variable proportion