TOTAL FIXED COST, TOTAL VARIABLE COST AND TOTAL COST CURVES

Total Fixed Cost: The total fixed cost (TFC) is fixed throughout the range of the
output output and it is irrespective of the level of output.

The TFC is positive even at Zero level of output incurred on fixed inputs like the
size of the plant, land and building machinery, tools, equipment, implements,
contractual rent, insurance fee, maintenance cost, property tax, interest of the
capital, organizers salary etc. It is also known as supplementary cost of the
production. Hence, TFC curve is horizontal and parallel to X-axis as has been
shown in diagram 15.2.

Total Variable cost: The total variable cost (TVC) is the cost incurred on
variable input. It varies with the level of output. It is zero at the zero level of
output. It is the cost incurred raw material, labours wages, etc. In the short period
fixed input can not be changed but variable input can be changed hence, as
output varies in the short period they also varies while TFC remains constant. It
is also known as Prime cost of production. The curvature of TVC curve has been
shown in diagram 15.2.

Total cost: The total cost (TC) is summation of total fixed cost and total
variable cost (TC = TFC + TVC) in the short period. At zero level of output
total cost will not be zero but it will be equal to total fixed cost point. The
curvature of TVC and TC is exactly same as TC only maintains the horizontal
distance of TFC from TVC. Diagram 15.2 depicts a description of total cost curve.

Diagram 15.2 shows TFC, TVC AND TC simultaneously. The line which is
horizontal and parallel to X axis is the total fixed cost curve. The line starting from
the origin is the total variable cost curve and the line which starts from fixed cost
point P is the total cost curve. The gap between TC and TVC which has been
shown by the shaded area is the fixed cost, which if added to TVC becomes total
cost. The gap lies only in the short period. It disappears in the long period all
inputs are variable and hence all costs are variable. Fixed costs are also termed
as supplementary cost and variable costs are also termed as prime cost.

AVARAGE COSTS OR UNIT COSTS

There are various kinds of unit costs. Average cost, average variable cost,
average cost and marginal cost curves are unit costs curves in the short period.
The unit costs are obtained by dividing total costs with the level of output.

AVAREAGE FIXED COST (AFC)

The average fixed cost (AFC) is the total fixed cost (TFC) divided by the level of
output. The AFC curve continuously declines. As the output increased the fixed
cost gets distributed throughout the range of output which causes fall in AFC.
The shape of AFC curve is like rectangular hyperbola. AFC initially falls very
rapidly and then falls gradually. Finally at higher level of output AFC becomes
negligible and the curve comes very close to X-axis but it will never touch the X-
axis as has been shown by diagram 15.3 and table 15.1 The AFC curve is
negatively sloped throughout because as output increases the ratio of fixed cost
to output also decreases.

Initially, AVC falls due to operation of law of increasing returns and later it rises
due to operation of the law of diminishing returns. Hence, the curvature of AVC is
influenced by laws of returns. Since average production (AP) initially rises,
reaches maxima and then rises thereafter. Hence, the behavior of AVC is
reverse of AP. This relationship has been clearly depicted in diagram 15.4 table
15.1 also clearly shows the behavior of AVC curve. Diagram 15.4 shows that
AVC curve is just reverse of AP curve.

AVERAGE COST (AC)

The average cost (AC) is the summation of average fixed cost (AFC) and
average variable cost (AVC) or it is the total cost (TC) divided by output. The
behavior of AC is influenced by AVC and AFC curves. Initially, AFC and AVC
both falls rapidly and hence AC also falls rapidly. Then AFC falls and AVC rises
slowly. Tate of fall in AFC is higher than rate of rise in AVC and hence AC
continues to fall and reaches minima. Afterward AFC falls at a very slow rate but
AVC rises rapidly and hence AC also rises rapidly. As AFC curve approach to X-
axis, the AC curve will approach to AVC. Diagram 15.5 depicts the kind of
relationship explained her. Table 15.1 also clarifies the behavior of AC curve.
The AC curve is U shaped. It is U shaped because initially there are economies
of scale and later there are diseconomies of scale.

Diagram 15.5

MARGINAL COST (MC)

The marginal cost is the change in total cost divided by one unit change in the
output. It is just an addition to total cost of production when there has been one
unit addition to the output.

MC –d(TC)
Dq

Where d (TC) is change in total cost and dQ is change in output.

Or

MC=TCn – TCn-1

(Where n is given number of output)

For example, if total cost of producing 9 units of a commodity is Rs500 and 10

units of a commodity is Rs. 525, then marginal cost may be differentiated with the
incremental cost.
The marginal cost varies with the variation in AVC. It is independent of fixed cost.
Marginal cost initially falls, reaches minima and continuously rises thereafter.
While rising is equal to them and when AVC and AC are minimum, MC is equal
to them and when AVC and AC are rising then MC is above them. MC curve
represents pattern of change in TVC and TC. A falling MC means increasing
marginal productivity of variable input. Table 15.1 clarifies the behavior of MC
curve. The MC curve is shaped as a right symbol. Diagram 15.6 depicts the
curvature of MC curve. Diagram 15.6 depicts the curvature of MC curve. Diagram
15.6 shows that initially MC falls, reaches a minimum at P2 and then rises
thereafter. While raising it is equal to AVC (at point) and AC (at P1 point) at their
minimum.

Diagrame 15.6

RELATIONSHIP BETWEEN AVERAGE COST AND MARGINAL COST.

The average cost and marginal cost are interrelated. There interrelation has been
explained in following points:-

Initially, AC and MC both falls but MC falls more rapidly that AC. Later. AC and
MC both rises but MC rises more rapidly that AC.

When AC is falling MC is below the AC because fall in marginal cost pulls down
the average cost.

When AC is minimum it is equal to MC. The Mc Curve cuts the AC curve at its
minimum,

When AC is rising MC is above AC because rise in marginal cost pulls the

average cost up of the plants available to affirm. A curve enveloping various plant
sizes of short run average cost curves is known as long run average cost curve.
LAC is flat U shaped.

Diagram 15.8

In diagram 15.8 three plant sizes small. Medium and large have been shown.
SAC1 represents small size, SAC2 represents medium size and SAC3
represents large size of the plant. It a firm feels that output associated with point
D is most profitable, then the firm will select SAC3. At SAC1 per unit cost can be
reduced to the level of B point by expanding output to the amount associated
with B.

LAC curve can be drawn by combining all those points of least cost of producing
the corresponding output. A firm’s choice of selecting a particular size of plant
would depend on the volume of output it anticipates. The firm will select that SAC
which provides least per unit cost to its level of anticipated output. In diagram
15.7 LAC has been obtained by combining point A, C and D which represents
least per unit cost of production OX1, OX2 AND OX3 out put, respectively.