Short period is a period of time which is not sufficient enough to allow supply to be fully adjusted with the increased demand. In short-period certain inputs can’t be increased or decreased. There are certain inputs whose amount- cannot be changed irrespective of output produced. Production can be partly increased by using the existing equipments more intensively. There are certain factors which are subject to change. These are called variable factors. Hence in short period two types of costs viz. fixed costs and variable costs are incurred.
(I) Total fixed cost (TFC)
Total fixed cost is independent of the volume of output. This cost remains unchanged regardless of change in output. These costs are incurred on factor inputs which can’t be changed in the short period. These costs continue even of the production if output is zero. Fixed costs are also called supplementary costs or overhead costs. These costs are in form of rent, interest and salaries and wages of permanent staff. Total fixed cost curve is a horizontal straight line parallel to OX-axis. It indicates that TFC remains the same at all levels of output.
(2) Total variable cost (TVC):
Variable costs vary with the volume of output. This cost depends upon the output. If output is more TVC is more, on the other hand if output is less TVC is less. These costs fall to zero when output is zero. Variable costs are also known as prime costs. They include payments made to the workers, suppliers of raw materials, fuel, power, transportation etc. which depend on the rate of output.
(3) Total Cost (TC):
Total cost is the sum total of total fixed cost and total variable cost. Total cost of production depends on the total volume of production. With the rise in the volume of production total cost rises. As total fixed cost is unchanged, the rise in total cost is brought about by the rise in total variable cost. Thus TC = TFC + TVC.
The relation between total final cost, total variable cost and total cost is depicted in the following diagram.
0 X-axis measures total output and OY-axis measures cost of (TC, TFC, and TVC). TFC is parallel to OX-axis. OP “is the total fixed cost of zero output. It remains the same at all levels of output. TVC curve starts from origin. It refers to that when output is zero, TVC is zero. TVC increases at an increasing rate up to a point and
There after it starts rising at a diminishing rate. The TC curve has the same shape as TVC but is runs above TVC curve. The distance between TC curve and TVC curve is same throughout and as such the difference between TC and TVC is the TFC.
(4) Average fixed cost (AFC):
Average fixed cost is the fixed cost per unit of output. As total fixed cost remains the same throughout, average fixed cost goes on falling with every increase in output. Since fixed cost is fixed amount it gets distributed over wide range of output. That is why it continues to fall with increasing volume of output. Average fixed cost is computed by dividing the total fixed cost by the total output. AFC falls constantly but never touches OX-axis.
AFC = TFC
(5) Average variable cost (AVC):
Average variable cost is the variable cost per unit of output. The average cost is obtained by dividing the total variable cost with the total output. The average variable cost will generally fall as the output increases from zero to the normal capacity due to the operation of increasing return. But beyond the normal capacity output the average variable cost will rise steeply because of the operation of diminishing return. Thus AVC curve falls first, reaches a minimum and then rises.
(6) Average Cost (AC)
Average cost’s is the total cost per unit of output. Since the total cost is the sum total of variable cost and total fixed cost, the average cost is the sum of average variable and average fixed cost. Average cost takes the shape of English letter ‘V’. The AC curve goes on decling till it reaches the minimum and there after it starts rising again. Below is shown the shape of an ‘AC’ curve.
Marginal cost is the addition to total cost by producing one more unit of output. In other words marginal cost is the addition to the total cost of producing ‘n’ units instead of (n-1) units when ‘n’ is any given number.