In the short run, a firm incurs various fixed expenses such as lease payments, insurance premiums, and machinery depreciation. Collectively, these are known as the total fixed cost (TFC) of production. Graphically, TFC is depicted by a straight line parallel to the x-axis, with cost on the vertical axis and the quantity of output on the horizontal axis.
Variable costs include expenses that change with the output level, such as materials used and wages of workers paid hourly. Collectively, these are known as the total variable cost (TVC). Graphically, the TVC curve starts from the origin, indicating that total variable costs are zero when there is no production. Its shape is upward-sloping, but the rate at which it rises varies across the quantity produced. Initially, the curve slopes gently upward, indicating that total variable costs initially increase at a relatively lower rate, and then eventually rise faster.
The total cost or TC (Read as T-C) is the summation of TFC and TVC. The curve is expressed as the vertical summation of these two curves. Fixed costs set the starting point of the total cost curve, reflecting the expenses incurred even with zero production. As production increases, the TC curve slopes upwards. It is parallel to the TVC curve because the vertical distance between them, the TFC, is unchanged as production increases.
