Page 186 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

Variable cost is one which varies at the level of output. This cost changes if production changes. If Notes
production gets low then this cost decreases and vice versa. If the production is zero, this cost is also
zero. These costs are also called Prime Costs, Direct Costs or Avoidable Cost. These expenditures are
included in variable cost—(1) Expence on raw material, (2) Wage of direct labour, (3) Expenditure on
electricity and (4) Expenditure on repairing.
The variable cost can be shown by Table 2 and Fig. 9.3.

Table 2: Variable Cost

Output Variable Cost (in )
0 0
1 10
2 18
3 24
4 28
5 32
6 38
7 46
8 62
Table 2 shows that as the production increases, the variable cost also increases. When production was
zero then this cost was also zero.
In contrast, when production is increased by 1, then the variable cost is 10. When production is
increased and comes at 6, then the variable cost is 38.
From the above table it is clear that the variable cost of every factor of production does not find the
similar changes. The increment in variable cost is low until the four units of production. There is equal
increment in fourth and fifth units. After that, the variable cost of every unit is increasing. The main
reason behind this is to imply the Law of Production.
Fig. 9.3

Y
70 Variable Costs
60 VC
50
40
Cost (`) 30
20
10
0 X
12 3 45 6 7 8
Output

The variable cost can be represented by Fig. 9.3 too. In this figure the quantity of production is
represented on axis OX and cost is on axis OY. VC is variable cost curve. This curve is like inverse S.
This curve is going upwards. This proves that this is reflecting the variable factors of law. By this law, it
is clear that in the early stage of production, as quantity of production increases, the variable cost also
increases. This condition occurs till that point where the variable cost and the fixed cost mix. After this
as the variable factors mix and use with fixed factors, the productivity of variable factors gets low and
the average of variable cost increases.

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