Total Cost, Fixed Cost and Variable Cost curves


Fixed Cost - is the cost of fixed factors of production. Fixed Cost remains the same in the short run.

Variable Cost - is the cost of variable factors of production. Variable Cost increases with the increase in the quantity of production.

TC = TFC + TVC

(Total cost = Total Fixed Cost + Total variable Cost)

Consider a factory where factory is a fixed factor and the workers are variable factor.

Workers
( variable factor)

Output

Fixed cost ( cost of factory)

Variable Cost (wages of workers)

Total Cost = FC + VC

0

0

40

0

40

1

50

40

10

50

2

90

40

20

60

3

120

40

30

70

4

140

40

40

80

5

155

40

50

90

6

165

40

60

100

Drawing these points on a graph, the curves will be -

· Fixed cost remains the same at all levels of output.

· As the output increases, TC and Variable Cost increases.

· TC = FC + VC


2 comments:

Unknown said...

Excellent explanation

Gohar Shaikh said...

Excellent explanation