The economic cost is the sum total of both explicit and implicit cost including normal profits. Economic cost = Explicit cost + Implicit cost (including – normal profits) Total cost refers to total obligations incurred by the firm in producing any given quantity of output. It is the sum total of all expenditure (on using both fixed and variable factors) incurred in producing a given quantity of output.
In short-run total cost comprises of two parts:
(a) Total fixed cost
(b) Total variable cost
i.e., TC = TFC + TVC
Total Fixed Cost: TFC refers to the total cost incurred by the firm on the use of all fixed factors. TFC does not change with the change in output in the short-run production function. It remains the same regardless of the quantity of output. It never becomes zero even at zero levels of output.
It is calculated as:
TFC = TC – TVC
where TC = Total cost
TVC = Total variable cost
Total Variable Cost: TVC refers to the total cost incurred by a firm on the use of variable factors. This cost includes payments for raw material, wages, for fuel power etc. These costs vary directly with the level of output, rising as more is produced and falling as less is produced.
TVC = TC – TFC
In the given diagram TC curve is obtained by adding up vertically the TFC curve and TVC curve because TC is the sum of TFC and TVC at every level of output. Since a constant FC is added to the TVC, the shape of the TC curve is same as that of TVC curve. The vertical difference between the TVC curve and the TC curve is the same at levels of output because of TFC. TVC curve starts from zero then increases at a decreasing rate first and at an increasing-rate subsequently with an increase in total output.
