Derivation of short-run cost curves
1. Total fixed cost (TFC):
Fixed cost refers to the expenditure incurred by the producer on the fixed factor of production. It is also known as the total cost made on the fixed factor. In the short run, they do not change with change in output. It remains fixed although the fixed factors are increased or decreased to alter the output. It can be explained by the help of following schedule and diagram:
|Outputs (in units)||Total fixed cost (in Rs.)|
In the above diagram, we can see that TFC curve is parallel to x-axis because fixed cost remains constant at all levels of outputs in the short run.
2. Total Variable Cost (TVC)
Variable cost refers to the cost incurred by the variable factors of production. It does not remain constant like the fixed cost at different levels of output. Whenever the output increases or decreases the variable cost will also increase or decrease. It can be explained by the help of following schedule and diagram:
|Output (in units)||Total variable cost|
In the above figure, we can see that TVC curve increases at a decreasing rate at first and then increases at an increasing rate after some units of production because of applicability of the law of variable proportion in the short run.
3. Total cost (TC)
Total cost is defined as the total monetary expenditure incurred in the production process. It is the sum of the fixed cost and total variable cost.
TC=TVC + TFC
It can also be explained by the help of following schedule and diagram:
In the above figure, costs are shown along y-axis and outputs are shown along the x-axis. TFC is parallel to x-axis because it is constant at all levels of output. TVC is increasing as the output are increasing. TC is also increasing because of variable cost is also included in it. The nature of TC and TVC are similar. They are parallel to each other. The only difference is that TVC starts from origin and TC starts above the origin.