Page 125 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes On the other hand, there are factors such as capital equipment, building, top management
personnel which cannot be readily varied – it requires a comparatively long time to make
variations in them. It takes time to expand a factory building or to build a new factory building
with larger area or capacity. Similarly, it also takes time to order and install new machinery.
Fixed costs are those which are independent of output, i.e., they do not change with changes
in output. These costs are a “fi xed” amount which must be incurred by a fi rm in the short run,
whether the output is small or large. Fixed costs are also known as overhead costs and include
charges such as contractual rent, insurance fee, maintenance costs, property taxes, interest on
the capital invested, minimum administrative expenses such as manager’s salary, watchman’s

wages, etc. Thus, fixed costs are those which are incurred in hiring the fixed factors of production

whose amount cannot be altered in the short run.
Variable costs, on the other hand, are those costs which are incurred on the employment of
variable factors of production whose amount can be altered in the short run. Thus, the total
variable costs change with changes in output in the short run. These costs include payments such
as wages of labour employed, the price of the raw material, fuel and power used, the expenses
incurred on transporting and the like. Variable costs are also called prime costs.

Total cost of a business firm is the sum of its total variable costs and total fi xed costs.
Thus, TC = TFC + TVC
In Figure 9.1, output is measured on the X-axis and cost on Y-axis. Since the total fi xed cost
remains constant whatever the level of output, the total Fixed Cost Curve (TFC) is parallel to the

X-axis. This curve starts from a point on the Y-axis meaning thereby that the total fixed cost will
be incurred even if the output is zero.
Figure 9.1: Total Cost Curves

On the other hand, the Total Variable Cost (TVC) Curve rises upward showing thereby that as
the output is increased, the total variable costs also increase. The Total Variable Cost (TVC) starts
from the origin which shows that when output is zero the variable costs are also zero. It should
be noted that total cost is a function of the total output, the greater the output, the greater will be
the total cost. In symbols, we can write

TC = f (q), where q is the output
Total Cost (TC) Curve has been obtained by adding up ‘vertically’ the total fixed cost curve and

total variable cost curve because the total cost is a sum of total fixed cost and total variable cost.
The shape of the total cost curve is exactly the same as that of total variable cost curve because
the same vertical distance always separates the two curves.

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