Short Run Costs
The short period, short is defined as the period of time over which some factor inputs, called fixed factors, connote be varied. In other words, the scale of plant is given and constant. Land, factory building, heavy capital equipments services of management of high category are some of the factors that cannot be varied in a short span of time. That is why they are called fixed factors.
On the other, are some factor-inputs that con being varied as and when required, they are called variable factors. For instance, power, fuel, labour, raw materials, etc. are the examples of variable factor-inputs.
Since in the short-run a firm employs two types of factors-fixed factors and variable factors, costs are also of two types-fixed costs and variable costs.
- Fixed Costs. Fixed costs (also known as supplementary costs or overhead costs) are the expenses incurred on the fixed factors of production. Or, the fixed costs are the costs that do not vary with the output. Rent; interest; insurance premium; salaries of permanent employees, etc are the example of fixed cost.
- Variable costs. Variable costs (or prime costs) are the expenses incurred on the variable factors of production or the costs that vary directly with the output. Expenses on raw materials, power and fuel; wages of daily laborers, etc. are the examples of variable cost.
Total Costs Curves in the Short Run
There are three concepts concerning total cost in the short period: Total fixed cost: total variable cost and total cost.
- Total Fixed Cost (TFC). Total fixed Costs are those costs that not vary with the output. They will be the same if output is zero or units or 1 million units. Thus, they are totally unaffected by the changes in rate of outputs. Examples of fixed costs are: (i) Initial establishment expenses, (ii) Rent of the factory, (iii) Expenses on the maintenance of machinery, (iv) Wages and salaries of the permanent staff, (v) Interests on bonds, (vi) Insurance premium.
TFC = quantities of the fixed productive service X factor price.
Total fixed cost of a firm is illustrated in the following table and TFC
| Units of output TFC (Rs) |
| 0 200
1 200 2 200 3 200 4 200 5 200 |
Curve is a horizontal curve parallel to the X-axis that tells us that total fixed cost remains the same at all levels of output.
- Total Variable Cost (TVC). The costs that directly with the output, rising as more is produced and falling as less is produced, are called total variable costs. They are also referred as prime costs or Direct costs or Avoidable costs, Example of variable costs are: (i) wages of temporary laborers; (ii) raw material; (iii) fuel; (iv) Electric power, etc.
TVC = quantities of the variable productive service X factor price.
Total Variable cost is illustrated in the following table and diagram:
| Units of Output TVC (Rs) |
| 0 0
1 180 2 300 3 400 4 520 5 650 6 820 7 1060 8 1400 |
Our above table and diagram speak that total cost varies directly with the volume of output. TVC curve form the origin, up to a certain range it remains concave from below and then it become convex. It shows that in the beginning total variable cost rises at a diminishing rate and thereafter it rises at an increasing rate.
- Total Costs. Total cost means the total cost of producing any given amount of output. When we ass total fixed and total variable costs at different rates of output, we get the corresponding total costs.
Thus,
TC = TFC + TVC
Since, fixed cost are constant and variable costs necessarily rise as output rises, total costs also rise with the output or, to put the point more formally, TC is a function of total product and varies directly with it. TC = f (9)
TC (Total cost) curve can be obtained by adding TFC and TVC curves vertically at each point.
Again, since the total fixed costs by definition remain constant, the changes in total costs are entirely due to the changes in total variable costs. In other words, the rate of increase of total cost is the same as of total variable cost, as one of the two components of total cost, remains constant. TC and TVC curves therefore have the similar shapes; the only difference is that TVC starts from origin (0) while TC curve starts above the origin.
The relationship between these three – TFC, TVC and TC is illustrated in the following table and diagram:
| Units of Output | TFC (Rs.) | TVC (Rs.) | TC (Rs.) |
|
| 0 | 200 | 0 | 200 | |
| 1 | 200 | 180 | 380 | |
| 2 | 200 | 300 | 500 | |
| 3 | 200 | 400 | 600 | |
| 4 | 200 | 520 | 720 | |
| 5 | 200 | 650 | 850 | |
| 6 | 200 | 820 | 1020 | |
| 7 | 200 | 1060 | 1260 | |
| 8 | 200 | 1400 | 1600 |
The difference between the TFC and TC curves represents the TVC. Since TVC rises with the increase in output, this difference between TFC and TC also goes on increasing. This is shown in the following diagram.
Similarly the vertical difference between TC and TVC curve represents the Total fixed Cost (TFC). Since total curves also remains the same. That is way TC and TVC curves remain parallel to each.
Unit Cost Curves in the Short-Run. The cost output relationship can be studied in the following discussion. The main short-run cost curves are;
- Average Fixed Cost and Output. The more output, the less the fixed cost per unit i.e. the average fixed cost go down with the increase in output. The reason is simple to understand-that total fixed costs remain the same and do not, vary with a change in output. This relationship between output and fixed cost is universal for all types of business concerns.
Average Cost (AC) curve; and Marginal Cost (MC) curve, for price and output determination, per unit cost curves are more useful than the total costs just discussed.
In this way, average fixed cost increases with the decrease in output or vice versa. In other words, average fixed cost and output have inverse relationship.
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