Total Cost Functions

As discussed earlier, short run is a time period during which some of the firms' inputs are fixed. Total fixed costs (TFC) are the total costs per period of time incurred by the firm for the fixed inputs. They include:

(a)     Interest payment on borrowed capital,

(b)     Contractual rent,

(c)     Depreciation of machinery and building,

(d)     Property taxes, and

(e)     Salaries of administrative staff and I or salaries fixed by contract.

These costs have to be incurred despite negligible output by the firm. In the example, the firm has to incur TFC of Rs 60 even though output is zero, in order to remain in business. At zero output, the TC of the firm is equal to fixed costs. The TFC curve shown in Fig. 6.1 is a horizontal line parallel to X-axis.

The costs incurred for variable inputs are the total variable costs (TVC). They include:

(a)     Payment for raw materials,

(b)     Fuel and power used,

(c)     Depreciation by use of plant and equipment,

(d)     Wages for direct labour and/or temporary employees, and (e)   Excise taxes.

Running expenses like routine maintenance and ordinary repairs are also included in variable expenses. The TVC increases with the increase in output of the firm, since a larger output requires more variable inputs. In Fig. 6.1, the TVC increases at a decreasing rate initially till the point of inflexion (point G') and then at an increasing rate. This is due to the operation of law of diminishing returns as shown in Fig

In the figure, the TP curve shows increasing returns to variable input (labour) till L and then decreasing returns. The input level L corresponds to the output level Q. The TVC curve increases at a decreasing rate upto Q and at an increasing rate beyond Q.

Total cost (TC) is the sum of TFC and TVC. The TC curve is parallel to the TVC due to fixed costs in the short run. They differ from the TVC by the fixed cost of Rs 60. 

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