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The concept of total fixed and variable costs comes under the product pricing part of microeconomics. When entrepreneurs start production, they have to employ different inputs such as labour, capital, raw material, etc. They have to make payments for these inputs.
The expenditure incurred on the said inputs is comprehended as production or production costs. Total fixed cost and total variable cost are two types of production costs, meaning that a firm incurs these costs to produce goods and services. When we add total fixed cost and total variable cost, we get the total cost of production.
Concept of Cost
For a business or firm to run, it needs a lot of input. The expenses incurred by these inputs, like raw material, labour, machinery, taxes, etc., are called costs. There are three types of cost-
- The total cost can be understood as the maximum expenditure incurred by a company on the factors of production required for the production of goods and services. Total cost is the sum of total fixed cost and total variable cost at various output levels.
- Average cost: it refers to the total production cost per unit. It can be calculated by dividing the total cost and the whole quantity of output. For example, the cost of production for two units of a commodity is Rs. 80. So, the average cost would be Rs. 40.
- Marginal cost refers to the net addition made to the total cost by producing one more output unit. It is calculated by dividing change in total cost by change in the total quantity of output. For example, the total cost for producing two units of a commodity is Rs. 200, and the total cost of producing three units of the same commodity is Rs. 260, then the marginal cost is Rs. 60.
Concept of Total Fixed Cost
It is also called supplementary costs of production by Professor Alfred Marshall, known as the father of microeconomics. Total fixed cost is costs incurred by a firm on fixed factors of production. These costs, which a firm incurs on fixed factors, do not change with the increase or decrease in output, independent of the output level.
They are to be incurred by a firm even when the production is temporarily stopped. They include payments like rent for land or building, interest paid on borrowed money, insurance charges, property tax, depreciation, maintenance, expenditures, wages, salaries of the permanent staff, etc. They are also called overhead costs because they are usually over and above the usual production expenses.
The total fixed cost formula is,
Total Fixed Cost= Total Cost of Production – Total Variable Cost
Now, let us look at the total variable cost and the total variable cost formula.
Concept of Total Variable Cost
It has also been called prime costs of production by Professor Alfred Marshall, known as the father of microeconomics. Total variable costs are costs incurred by a firm on the variable factors of production. These costs, which a firm incurs on variable factors, change with the increase and decrease in the output as they are directly dependent on them. The total variable cost rises with the increase in output and falls with the decrease in output. They cease when the production stops altogether. They include raw material, power, water, taxes, hiring of labour, fuel, advertising, etc. They are also called direct costs, as they are directly dependent on production output.
The total variable cost formula is,
Total Variable Cost= Cost Per Unit X Total Number of Units
For example, the total variable cost for the production of 5 pencils each at Rs. 10 would be-
Total Variable Cost= 10 X 5= 50
Therefore, the total variable cost is Rs. 50.
The concepts of total fixed cost and total variable cost help us understand the short-run production and its curves.
Conclusion
The concept of total fixed cost and total variable cost is extremely important in understanding the short-run production of a firm. They are also important concepts of costs. Total fixed cost is incurred on fixed factors of production like land, labour, etc., whereas total variable cost is incurred on the variable factors of production like salaries, taxes, etc. The change in the former is independent of output, whereas the change in the latter is dependent on output. The firm incurs total fixed cost even when the production is temporarily ceased, but in total variable cost, the firm doesn’t incur any cost if the production ceases.
