Page 104 - 6727
P. 104
Economic Theory
The variable costs include the cost of:
a) Direct labor, which varies with output.
b) Raw materials; and
c) Running expenses of machinery.
The sum of fixed and variable costs constitutes the total cost of
production. Symbolically,
TC = TFC + TVC (8.3)
Total fixed cost is the sum of expenses incurred on those inputs that
remain same at different levels of output. Total fixed cost is a straight line
parallel to output or x-axis. TFC is the total fixed cost curve parallel to x-
axis indicating that it remains constant at all levels of output.
Total variable cost is the sum of expenses incurred on those factor
inputs whose quantity varies with a change in the level of output. Total
variable cost curve TVC has inverse-S shape. Total variable costs increase
as the level of output increases.
The adjacent Figure 8.1 shows total cost of production which is the
sum of total variable cost and total fixed cost.
Figure 8.1 – Total cost, variable cost and fixed cost
Average fixed cost is total fixed cost divided by total output. It is per
unit cost on fixed factors.
Symbolically,
TFC
AFC , (8.4)
Q
104
