Total Cost, Total Fixed Cost, and Total Variable Cost
To understand the concept of the total cost, total fixed cost, and total variable cost, we will start with the meaning of cost, cost of production, and so on. I will be discussing these cost meaning, curves, schedule, and the relationship between them in detail. In this post, I will be covering the following concepts:
What is Cost?
Cost refers to monetary and non-monetary expenditure incurred by a producer on the factor inputs as well as non-factor inputs.
What is the Cost of Production?
The cost of production shows the functional relationship between output and cost involved in carrying out the production process.
What is the Total Fixed Cost?
The total fixed cost, fixed cost, supplementary cost, and overhead cost means the same. Total fixed cost is those which remain fixed even when the output is changing.
For example, fixed rent on the land, fixed tariff on electricity, etc.
Total Fixed Cost Schedule
|Output||Total Fixed Cost|
Total Fixed Cost Curve
The total fixed cost curve is perfectly elastic or it is parallel to the x-axis.
What is the Total Variable Cost?
The total variable cost or the variable cost or prime cost or direct cost or special cost is the one that varies with the level of output. It can be 0 at 0 levels of output.
For example, wages of temporary laborers, cost of raw material, electricity, etc.
Total Variable Cost Schedule
|Output||Total Variable cost|
Total Variable Cost Curve
The total variable cost curve is inverse S in shape.
What is the Total Cost?
Total cost is the sum of the Total Fixed Cost and Total Variable Cost.
Total Cost = Total Fixed Cost + Total Variable Cost
TC = TFC + TC
Total Cost Schedule
To derive Total cost schedule, we will add TFC and TVC
|Output||TFC||TVC||TC = TFC+ TVC|
Total Cost Curve
The shape of the total cost curve is parallel to the total variable cost. The total cost curve is also inverse S in shape.
The gap between TC and TVC is fixed due to Total fixed cost.
TC- TVC = TFC
What is the Marginal Cost?
In the short run, when both TVC and TFC exist, then marginal cost is the addition made to the TVC when one more unit of the output is produced.
In short run, MC = Change in TVC/ Change in the level of output
In the long run, when only TVC exist, that is, TVC + 0 = TC because total fixed cost do not exist in the long run. Then, TVC and TC become equal. So, marginal cost is the addition made to the total cost when one more unit of the output is produced.
In the long run, MC = Change in the TC/ Change in the level of output
Marginal Cost Curve
Marginal cost curve is U shaped.
Tips to understand the cost concept:
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