Question

Explain total cost in detail.

Answer 1

Total cost (TC):

• The summation of Total Fixed Cost (TFC) and Total Variable Cost (TVC) is called Total Cost (TC).
  ∴ TC = TFC + TVC
• There is a cause-effect relationship between total production and total cost. If total production is more, total cost is more and if total production is less, total cost is also less.

Diagram of total cost

Graph and curve:

• When the production increases, the fixed cost remains fixed but variable cost increases and so total cost also increases. Due to this reason, Total Cost (TC) curve lies above Total Variable Cost (TVC) curve.
• However, the difference between TC and TVC remains constant because of which TC and TVC remain parallel to each other.

Example:

• As shown in the diagram, X-axis represents production and Y-axis represents cost. The upper curve is of TC and the lower is of TVC.
• Total cost curve begins from point P on Y-axis. Point P of TC which lies at ₹ 100 shows that even when output is 0, Total Fixed Cost i.e. TFC = 100, while Total Variable Cost TVC = 0.
• As the production increases TFC remains constant and TVC increases. Due to this TVC curve moves upward from left hand side to right hand side and TC curve is upside and parallel to TVC curve.

Important conclusions:

• When production is 0, TVC = 0.
• When production = 0, VC = 0. TFC = TC = OP.
• When production = OQ₁ TFC = Q₁b, VC = Q₁C and TC = Q₁a.
• When production = OQ₂, TFC = Q₂f, VC = Q₂g and TC = Q₂e.