What are the total fixed cost, total variable cost and total cost of a firm? How are they related?
a) Total fixed cost refers to the cost which remains constant irrespective to the level of output, the total fixed cost will never change. For example, suppose Mr X hired a shop at a dent of rupees 500 per month for selling grocery, during first month he keeps a shop closed even then he will have to pay the rent so rent is fixed cost.
Let’s understand it with help of following cost schedule and graph
Cost Schedule
No. Of Units Produced | Total Fixed Cost |
0 1000 2000 3000 4000 5000 | 1000 1000 1000 1000 1000 1000 |
Graph
b) Total variable cost is the cost of the variable inputs employed by the firm which is directly proportional to the level of change in the output. It becomes zero when the level of output is zero, increases with output, decreases with output.
Let’s understand it with help of following cost schedule and graph
Cost Schedule
No. Of Units Produced | Total Variable Cost |
0 1000 2000 3000 4000 5000 | 0 1000 1800 2600 3500 5000 |
c) Total cost is the sum of total fixed cost and total variable cost. At zero level of output total cost will be just the fixed cost.
Let’s understand it with help of following cost schedule and graph
Cost Schedule
No. Of Units Produced | Total Cost |
0 1000 2000 3000 4000 5000 | 1000 2000 2800 3600 4500 6000 |
Graph
