Q.Distinguish between Total Fixed Cost (TFC) and Total Variable Cost (TVC), giving two examples of each.

TFC and TVC are the two building blocks of short-run total cost, separated by whether the cost changes when output changes.

Total Fixed Cost (TFC) is the cost incurred on the fixed factors of production — factors that cannot be varied in the short run. TFC does not change however much or little the firm produces, and it must still be paid even if output is zero (a firm still pays rent and insurance even during a temporary shutdown). Examples: rent of the factory building, insurance premiums, depreciation on machinery, interest on a fixed loan, and salaries of permanent supervisory staff.

Total Variable Cost (TVC) is the cost incurred on the variable factors of production — factors that can be adjusted along with output in the short run. TVC is zero when output is zero (no variable factor is being used) and rises as output rises. Examples: cost of raw material, wages paid to casual or daily-wage labour, and the cost of power or fuel consumed in the production process.

The key distinguishing test is simple: does the cost change if output changes? If no, it is fixed; if yes, it is variable. Together, $TC = TFC + TVC$.

Students sometimes classify a cost as fixed or variable based on how large it is rather than how it behaves — a large one-time raw-material purchase is still a variable cost, and a small recurring insurance premium is still a fixed cost, because the correct test is whether the cost changes with output, not its size.