Short-Run Total Cost: TFC, TVC and TC

In the short run, a firm's total cost splits neatly into two parts depending on whether the cost changes with output.

Total Fixed Cost (TFC) is the cost of the fixed factors of production — it does not change however much or however little the firm produces, and it is incurred even at zero output. Rent of the factory building, insurance premiums, depreciation on machinery, interest on a fixed loan, and the salary of permanent supervisory staff are all fixed costs. Plotted against output, TFC is a straight horizontal line.

Total Variable Cost (TVC) is the cost of the variable factors — raw material, wages of casual/daily labour, fuel and power used in production. TVC is zero when output is zero and rises as output rises. It does not rise in a straight line: at first it rises less than in proportion to output, because increasing the variable factor alongside a fixed plant initially raises output efficiently (increasing returns to the variable factor); beyond a point it rises more than in proportion to output, because the fixed plant becomes crowded and each extra unit of the variable factor adds less extra output (diminishing returns). This is the 'law of variable proportions' showing up in cost form, and it is what gives the short-run cost curves their characteristic shape.

Total Cost (TC) is simply the sum of the two: $TC = TFC + TVC$. Since TFC never changes, the TC curve has exactly the same shape as the TVC curve, only shifted upward by the constant amount TFC.

Consider a small firm making notebooks, with TFC = ₹60 whatever the output: