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.
i.
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.
ii.
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.
i.
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.
ii.
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.
iii. 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;
a.
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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