Short-Run Cost Concepts: TFC, TVC and TC

The short run is the period in which at least one factor of production — typically the size of plant, machinery or building — is fixed, while other factors such as labour and raw material can still be varied. Short-run costs are classified according to whether they change with the level of output.

Total Fixed Cost (TFC) is the cost that does NOT change with the level of output — it must be paid even if the firm produces zero units, and it remains exactly the same at every output level as long as the plant size itself is unchanged. Rent of the factory building, insurance premiums, interest on a fixed loan taken to buy machinery, and depreciation of fixed equipment are typical examples. Plotted against output, the TFC curve is a straight horizontal line.

Total Variable Cost (TVC) is the cost that DOES change directly with the level of output — payments for raw materials, and wages of workers whose numbers rise as production expands. TVC is zero when output is zero (nothing has yet been produced to require variable inputs) and rises as output rises. Because of the law of variable proportions, TVC typically rises at a DECREASING rate at first (as increasing returns to the variable factor set in), and then at an INCREASING rate at higher output levels (once diminishing returns set in) — giving the TVC curve an inverse-S shape.

Total Cost (TC) is simply the sum of the two:

$TC = TFC + TVC$ …