Short-Run Cost and it's Types

 

Short Run-Cost

It is the time period where the firm can expand the output by changing the variable factor such as labor. Short Run Cost is divided into total fixed cost(TFC) and total variable cost (TVC). Mathematically;

Total Cost (TC)= TFC+TVC

a.      Total Fixed Cost

It refers to the expenditure incurred by the producer on the fixed factors of production like Capital. The fixed factor do not change with the  quantity of production. It remains fixed whether the output is increased or decreased or even it becomes zero. It include:

ü salaries of administrative staff

ü expenses for building depreciation and repairs

ü expenses for land maintenances

ü depreciation of machinery.

b.     Total Variable Cost

It refers to the cost incurred by the variable factor of production. It increases when the output increases, decreases when the output is zero. It includes:

ü the raw materials cost

ü the cost of direct labor

ü the running expenses of fixed capital, such as fuel, ordinary repairs

In the figure, As the total fixed cost (TFC) does not depend on the level of output, it is represented by a horizontal line. The total variable cost has usually an inverse-S shape which reflects the law of variable proportions. According to this law, at the initial stage of production with a given plant, as more of the variable factors is employed, its productivity increases and thus total variable cost(TVC) increases at a decreasing rate = AVC declines. When the productivity of the variable input falls, larger and larger units of the variable input will be needed to increase

output by the same unit and thus TVC and TC increase at increasing rates. By adding the

TFC and TVC we obtain the TC of the firm.

Short-Run Cost curve is U-shaped because:

a.      .Basis of the law of variable proportion.

b.     Invisibility of the factors

c.      Basis of AFC

d.     Basics of Reserve Capacity