Short Run Costs

Total Fixed Cost (TFC)

Total Fixed Cost is a term used to describe all forms of financial expenditures made on fixed production elements used in the production process. It consists of

• Wages for permanent employees.
• Any and all rental costs.
• Costs of any kind relating to machinery and equipment.
• Construction costs of every kind.

It is not affected by changes in output because it is independent of output. No matter how many units are produced—zero, one, or a thousand—the situation remains the same. It is also known as an overhead expense or an unavoidable cost.

Total Variable Cost (TVC)

The phrase "total variable cost" refers to all expenses the company has to pay while using variable factors. It contains:

• Various costs for raw commodities.
• A variety of machinery costs.
• Running costs for fixed assets like fuel, routine maintenance, and repair costs.
• The price of labor directly.
• Costs for transportation services.

It varies directly with changes in output volume, increasing as more is produced and decreasing as less occurs. Because there wouldn't be any variable costs if the company were to temporarily stop producing goods, this expense is known as an avoidable cost. Prime cost and direct cost are other names for it. As the output rises, it first climbs at a decreasing rate and then increases at a rising rate.

Total cost (TC)

Total cost, in the short term, is the sum of total fixed costs and total variable costs. It refers to all of the costs the company has to pay to produce a certain amount of product. The trend of the total cost is dependent on the trend of the total variable cost because the total fixed cost is constant across all levels of output. As a result, initially, the total cost rises at a decreasing pace, but after a certain point, it rises at an increasing rate, leading to an increase in output.

Average Fixed Cost (AFC)

It results from dividing the total fixed cost by the total quantity produced. It is also known as the fixed factor's per-unit cost. As output rises, it continuously decreases. However, it initially falls quickly and then more slowly. It is as a result of the fixed cost being split into a number of output units.

Average Variable cost (AVC)

It results from dividing the entire variable cost by the total amount generated. It is also known as variable factor per unit cost. The average variable cost's trend is influenced by the total variable cost's trend. Thus, the average variable cost grows when the total variable cost increases at an increasing pace and lowers when the total variable cost increases at a lowering rate.

Average Cost (AC)

The result of dividing the entire cost by the total quantity produced is the average cost. However, in the short term, the total cost is the sum of the total variable cost and the total fixed cost. The average cost in the short term is therefore made up of the average fixed cost and the average variable cost. The average cost initially decreases and then gradually increases along with a rise in output.

Short Run Marginal Cost (SMC)

The additional expense incurred by generating one extra unit of output is known as the marginal cost. However, the short-term marginal cost is linked to the variable element. The ratio of the change in the total variable cost to the change in the total amount produced is therefore the short-run marginal cost. The marginal cost rises when the overall variable cost increases at a reducing pace, and falls when the total variable cost increases at an increasing rate. When output is increased from n-1 units to n units of output, the total variable expenses are increased. Marginal cost is independent of the amount of the fixed cost. It should be noted that marginal cost of production is intimately related to the marginal product of variable factor.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan