7.3
Total Fixed, Total Variable, and Total Cost Curves
In the short run, a firm incurs various fixed expenses such as lease payments, insurance premiums, and machinery depreciation. Collectively, these are…
Consider a small firm making tables. In the short run, it incurs fixed costs, including factory rent and maintenance of machines. The sum of these costs is referred to as total fixed cost or TFC.
Graphically, TFC is a horizontal line parallel to the x-axis, as it remains constant regardless of output.
Variable costs include payments for wood and daily wage labor. The sum of these costs is the total variable cost or TVC.
In the absence of production, the TVC is zero. As manufacturing starts, the TVC increases because costs for wood and labor are incurred. Due to the increasing marginal product of labor that exists over the initial, early range of output, the TVC rises at a diminishing rate. However, later the TVC rises at an increasing rate due to the eventual onset of diminishing marginal product of labor. In this range of output, the workers may be idle, waiting for access to limited machinery, resulting in lower productivity.
The total cost or TC is the summation of TFC and TVC. TC is similar to TVC, and these are parallel. However, TC starts from the total fixed cost point since these are costs incurred regardless of output.
View the full transcript and gain access to JoVE Business videos
Q1: What is total fixed cost and why does it remain constant on a cost curve?
Total fixed cost (TFC) represents expenses a firm incurs regardless of output level, such as factory rent and machine maintenance. Graphically, TFC appears as a horizontal line parallel to the x-axis because these costs remain constant whether the firm produces zero units or maximum capacity. This unchanging nature distinguishes fixed costs from variable expenses.
Q2: How does total variable cost behave as production increases?
Total variable cost (TVC) starts at zero when no production occurs and increases as output rises. Initially, TVC increases at a diminishing rate due to increasing marginal product of labor. Later, TVC rises at an accelerating rate when diminishing marginal product of labor sets in, as workers become idle waiting for limited machinery access, reducing overall productivity.
Q3: What expenses are included in total variable cost for a manufacturing firm?
Total variable cost (TVC) includes all expenses that change with production levels, such as raw materials like wood and hourly wage labor payments. These costs directly correlate with output quantity—the more a firm produces, the higher its variable costs become, making them distinct from fixed expenses like rent.
Q4: How is total cost calculated and why is it parallel to the total variable cost curve?
Total cost (TC) equals the sum of total fixed cost (TFC) and total variable cost (TVC). The TC curve is parallel to the TVC curve because the vertical distance between them—the fixed cost—remains constant across all output levels. TC simply shifts the TVC curve upward by the amount of fixed costs incurred.
Q5: Why does the total cost curve start above the origin on a graph?
The total cost curve starts above the origin because it begins at the total fixed cost point. Even when production is zero, the firm still incurs fixed expenses like rent and machine maintenance. This starting point reflects costs the firm must pay regardless of whether any output is produced.
Q6: What causes the shape of the total variable cost curve to change from gentle to steep?
The TVC curve's shape reflects labor productivity changes. Initially, increasing marginal product of labor causes TVC to rise gently at a lower rate. As production expands, diminishing marginal product of labor emerges, causing TVC to rise steeply. Workers experience idle time waiting for limited machinery, reducing efficiency and increasing costs per unit produced.
Q7: How do fixed and variable costs differ in their relationship to production output?
Fixed costs remain constant regardless of output level, while variable costs change directly with production quantity. Fixed costs like rent and machine maintenance are unavoidable short-run expenses, whereas variable costs such as materials and labor scale with production volume. Understanding this distinction is essential for analyzing cost behavior and profitability.