Economics » Theory of Costs and Revenue » The Concept of Cost

Total Cost

This is the sum of total fixed cost and total variable cost. Thus, if output is zero in the short-run, TVC = 0, while TC = TFC. This is because TFC is always constant in the short-run.

\(\text{TC = TFC + TVC}\)

Total Fixed Cost (TFC):

This is the cost incurred on fixed factors. In the short run, TFC tends to be constant over time since the factors employed do not change with output. The firm still pays for fixed costs even if no output has been produced. Hence, they are sometimes referred to as unavoidable costs. Examples of fixed costs include rent on premises, rates, interest payments on loans, and hire purchase installment payments, etc.

Total Variable Cost (TVC):

This is the total expenditure on variable factors used in the course of production. Because the level of variable factors used in the short-run determines the level of output, TVC changes whenever output is varied. When the firm does not produce anything, variable costs are not incurred. Hence, they are sometimes referred to as avoidable costs. They may include wages of operative staff, cost of fuel, cost of raw materials, etc.

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