Time plays an important role in taking economic decisions for production. The distinction between fixed cost and variable cost is very much influenced by the time period. According to Marshall, there are three time periods.
1. The market period which refers to a very short period:
Here supply does not respond to change in price. Supply is price inelastic. There is no question of any change in fixed costs. Only variable costs may be incurred to some extent.
2. Short period refers to a period longer than the market period:
ADVERTISEMENTS:
In the short period with a change in price, the firm can change its output by changing the quantity of the variable factors. There is no change in fixed costs. Only variable costs may be incurred. The change in output occurs only up to the maximum capacity of the existing plant and machinery. Beyond this maximum capacity, production of the firm becomes price inelastic.
3. Long period is long enough to make supply more or less elastic:
The firm can change its output by changing all factors of production. Supply of goods becomes price elastic, New firms may enter or leave the industry. In this period price must cover not only fixed cost and variable cost but also normal profits. Here, all factors are variable and all costs are variable costs. The following table and figure explain the relationship between total fixed cost, total variable cost and total cost.