Show the relationship between total cost (TC), total fixed cost (TFC) and total variable cost (TVC) in short run.

In the short run, a firm faces a fixed relationship between Total Cost (TC), Total Fixed Cost (TFC), and Total Variable Cost (TVC). This relationship is mathematically expressed as:

$$TC=TFC+TVC$$

Explanation of the Relationship:

1. Total Cost (TC):

   • Represents the total expenditure incurred by a firm to produce a given level of output.
   • It includes both fixed and variable costs.

2. Total Fixed Cost (TFC):

   • These are costs that do not change with the level of production in the short run.
   • Examples include rent, insurance premiums, salaries of permanent employees, and depreciation of machinery.
   • TFC remains constant regardless of the quantity produced.

3. Total Variable Cost (TVC):

   • These costs vary directly with the level of production.
   • Examples include raw materials, wages of temporary workers, and utility bills.
   • TVC increases as output increases and decreases as output decreases.

Graphical Representation:

The relationship between TC, TFC, and TVC can be visualized using a cost curve diagram:

Key Observations:

• The TC curve is always parallel to the TVC curve because the difference between them (TFC) is constant.
• The vertical distance between the TC and TVC curves represents the fixed cost (TFC).
• If TFC = 0, then TC = TVC, meaning all costs are variable (a theoretical scenario).
• In the short run, TFC cannot be avoided, even if production stops (shutdown point).

Numerical Example:

Suppose a firm has:

• TFC = Rs. 5,000
• TVC at 5 units of output = Rs. 10,000

Then, the Total Cost (TC) is calculated as: $$TC=TFC+TVC=5,000+10,000=\text{Rs. 15,000}$$

This relationship helps firms in decision-making, such as determining the shutdown point and profit maximization.