Short run is the period of time during which some
factors are fixed and some are variable.
Short run costs are divided into two
components:
1) Fixed costs
2) Variable costs
Total
Cost = Total fixed cost + Total variable cost
i.e.
TC = TFC + TVC
Fixed
Cost :
Fixed costs are the sum total of expenditure
incurred by the producer on the purchase or hiring of fixed factors of
production.
These are also called supplementary costs or overhead costs or indirect costs.
These costs
do not change with the change of output, even when output is zero, fixed cost
remains the same.
For example: In a shoes manufacturing firm, a
machine is installed as a fixed factor.
If it can make 10 pair of shoes a day
and that the cost of hiring the machine is Rs. 100 per day.
So Rs. 100 per day
is the fixed cost that the producer has to incur even when no shoes is made in
a day.
Fixed costs include:
1) Expenditure on machine and plants
2) Expenditure on land and buildings
3) Licence fee
and related expense
4) Wages and salaries of permanent staff
Tabular
representation of Fixed cost
Units
of Output
|
Total Fixed Cost
|
0
1
2
3
4
5
6
|
10
10
10
10
10
10
10
|
The above table indicates that fixed costs remain
constant at all levels of output.
When output is zero unit , fixed cost is Rs.
10.
When it increases to two or four or six units, even then, total fixed cost
is Rs. 10.
Fixed cost are the fixed obligation of the firm
which must be incurred by the firm, whether the output is small or large.
Hence
also called Unavoidable cost.
Fixed
Cost Curve
 |
| fixed cost |
In the above figure, units of output are shown on X
axis and Total Fixed cost of production on Y axis. TFC curve represent the
total fixed cost.
This curve is parallel to X axis, implying that cost is
constant at all levels of output.
TFC curve touches Y axis at point ‘A’ which
means that fixed cost is Rs. 10 even when output is zero.
Since fixed factors are purchased before production actually
starts, fixed costs are incurred even when output is zero.
Variable
Cost :
Variable costs are the expenditure incurred by the
producer on the use of variable factors of production.
When output changes, these costs also changes.
As
the output increases, these cost also increase and as the output decreases,
these cost also decrease. When output is zero these costs are also zero. These costs are also called Prime cost or Direct costs or
avoidable cost.
For example : If the firm wants to produce more
shoes, they have to buy more of raw material like leather, yarn and more of
workers. Since these costs change with the change in the volume of output, they
are called variable cost.
Variable cost includes expenses like:
1) Purchase
of raw materials
2) Wages of casual and temporary workers
3) Expenses on electricity, fuel and power
4) Expenses on transportation
Tabular
representation of Variable cost
Units
of Output
|
Total Variable
Cost
|
0
1
2
3
4
5
6
|
0
10
18
24
28
32
38
|
The above table shows that as output increases,
total variable cost also increases.
When
output is zero, total variable cost is also zero.
When output is 1 unit, TVC
= Rs. 10 and when output is 6 unit, TVC = Rs. 38.
TVC initailly increases at decreasing rate upto 3
units of output (first 10 then 8 then 6 then 4-rate of increase is decreasing),
and after that increases at increasing rate (4 then 4 then 6- rate of increase
is increasing).
Variable
Cost Curve
 |
| variable cost |
TVC shows how
variable cost changes with output.
It is an upward sloping curve implying that
total variable cost tends to increase with increase in output But the rate of increase is different at different
levels of output (as explained in the above table also). TVC curve is
concave downwards up to point ‘A’ indicating that total variable cost increases
at a decreasing rate.
Reason: This is due to Law of Variable Proportion.
In the initial stages of production, a firm may be
enjoying increasing returns to a factor arising due to fullet utilisation of
fixed factors and greater specialisation.
It is a situation when MP (of the
variable factor) tends to rise.
Cost is just the opposite of productivity
(high productivity, low cost of production and vice versa). Rising MP means
falling cost.
When the cost of producing an additional unit is falling, TVC
should be increasing only at decreasing rate.
TVC curve is concave upwards after point ‘A’
indicating that total variable cost increases
at a increasing rate.
Reason: This is due to Law of Variable Proportion.
At the lower satges, a firm has dimnishing returns
to the variable factor arising from difficulty of management and
overutilisation of fixed factor.
It is a situation when MP (of the variable
factor) tends to fall. Falling MP means rising cost.
When the cost of producing
an additional unit is rising, TVC should be increasing only at increasing rate.
Total
Cost :
Total cost is the sum of total fixed cost and total
variable cost.
Total
Cost = Total fixed cost + Total variable cost
i.e.
TC = TFC + TVC
Tabular
representation of Total cost
Units of
Output
|
Total Fixed Cost
|
Total Variable
Cost
|
Total Cost
|
0
1
2
3
4
5
6
|
10
10
10
10
10
10
10
|
0
10
18
24
28
32
38
|
10
20
28
34
38
42
48
|
In the table above TC is found as the sum total of
fixed cost and variable cost.
Total
Cost Curve
 |
| total cost curve |
TC curve is obtained by adding up vertiacally the
TFC curve and TVC curve.
Since a constant fixed cost is added to the total
variable cost, the shape of TC is same as the TVC curve (both TVC and TC has
same slope).
TC curve originates not from O, but above the Fixed
cost curve, as at this point of zero level of output TC is equal to TFC, since
TVC is zero at zero level of output.
Thus , the TVC starts from the origin , while the TC
curve starts at the point where the TFC intersects the vertical axis.
Vertical
distance between the TVC and TC curve equals the amount of the TFC, and since
the TFC is constant, the vertical distance between TC curve and TVC curve is
same at all the level of output.
Like TVC, TC curve also increases at a decreasing rate first and then at an
increasing rate(law of variable proportion).
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