In the short run factors of production are in the nature of fixed and variable. The total cost of production includes total fixed and total variable factors. Expenditure incurred on the short run fixed factor and variable factor for making output constitutes fixed cost and variable cost respectively. Fixed cost is independent of output. It does not change with the change in output. This is a fixed amount to be incurred by the producer in the short period, liven it a firm classes down for a temporary period in the short run, fixed cost has to be incurred.
Therefore, fixed costs are those which are incurred in hiring the fixed factors of production whose amount cannot be altered in the short run. Fixed cost is otherwise known as overhead cost or supplementary cost. Fixed cost is in the form of contractual rent, salary of the permanent staff, insurance premium, property fare and interest on the capital invested etc.
Variable costs, on the other hand, are these costs which are incurred on the variable factors of production. Variable cost is incurred according to the volume of production. In the short run Output can be increased by changing variable cost only. Variable cost is more or less depending on the increase and decrease in the volume of production. In the short period a firm must cover up the variable cost otherwise the production of output ceases to stop. Variable cost is also called prime costs or direct costs. This cost is in the firm of payments made to the laborer, prices of raw materials, fuel and power, expenses on transporting etc. The total cost of an entrepreneur is thus the sum total of total fixed costs total variable costs. TC = TFC + TVC
Total cost being the summation of fixed cost and variable and fixed cost being fixed and definite, the rise in variable will lead to a rise in the total cost of production with the in the level of output. The total cost increases as the level
In the table given above the units of output are increased from 1-to 7 units of output. When there is zero output, the total fixed cost has to be incurred, because the firm cannot disperse with the fixed factors of production. In the short period if the demand condition is not favorable the producer will stop production keeping fixed factors idle. But he has to bear the fixed cost.
Regarding variable costs the above table shows that variable costs are equal to Rs. 15 when one output is produced and it increases to Rs.220 when seven units are produced. Total cost is the summation of TFC and TVC. It can be obtained by adding TFC and TVC. For example the total cost of producing units of output is Rs, 50 (Rs.25 + Rs.25). The total cost varies directly with output because a significant part of it increases as output is measured in OY-axis. The TFC curve runs parallel to OX-axis a fixed costs remain constant whatever the level of output. TFC curve starts from OY-axis showing that fixed cost is too incurred if there is zero output.
On the other hand total variable cost curve begins from the origin, showing that variable cost is nil when there is zero production. Thus the total cost is the function of total output. The greater the output the greater will be the total cost.
Total cost (TC) is obtained by adding up vertically total fixed cost and total variable cost curve. The vertical distance between the TVC curve and TC curve is constant throughout TC curve runs upward in parallel to TVC curve. The vertical distance between the TVC and TC measures total fixed cost which remains constant ns output increases. The vertical distance between the total cost (TC) and the total fixed cost curve measures the amount of variable costs. The shape of TC curve is according to the shape of TVC curve.