Using the Total Cost Curve to Make Production Decisions in the Short-Run

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  • 0:03 What Is Total Cost?
  • 1:00 The Total Cost Curve
  • 2:52 Decisions in the Short Run
  • 4:25 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

If you've ever wondered how ice cream trucks don't carry so much ice cream as to cause it to melt out the back door, then this lesson on total cost curves and production decisions is for you.

What Is Total Cost?

Just like anyone who purchases anything, producers have to be mindful of the costs of their resources. If you've been following the other lessons in this chapter, you are aware that economists tend to classify costs as either fixed or variable. Fixed costs are those costs that do not change with the quantity produced. From regulatory fees to accounting overhead to managers' salaries, these costs are independent from the total quantity of goods made. Variable costs, on the other hand, are entirely dependent on the amount of goods produced. From wages for hourly employees to machinery upgrades to raw materials, these costs are dependent on the total quantity made. An equally important number, however, is the total cost, found by adding the variable cost of all units produced with the fixed cost of business.

The Total Cost Curve

It probably doesn't surprise you that economists have a curve to model total costs. Luckily, it is one of the easiest in the field to decipher.

Total Cost Curve

This graph does have a few abbreviations that you'll need to know to understand it. First of all, TC just means total cost, while TVC means total variable cost and TFC means total fixed cost. From looking at the graph, you can tell that total cost and total variable cost have the same shape, but there is just a space in between. That space is exactly equal to the value of total fixed costs.

Now, let's look at this graph and draw some conclusions. First of all, you'll notice that, early on the lines, variable cost rises quickly. This may sound counter-intuitive to what you'd expect if you're thinking, 'Hey wait, variable costs aren't supposed to increase that much at first.' However, this tracks production from zero. Going from zero to having a factory is going to require some upgrades, and those are represented as variable costs.

However, then you'll notice that the graph levels out, adding relatively little in the way of cost for each new unit of production. This is the point where those upgrades really pay off. Companies like to have their production in this part of the graph. Finally, you'll notice that then, to the far right, costs start to rise dramatically again. This is as a result of variable costs rising quickly. Your company may require a new factory, for example. Just as above, the cost for that upgrade would be factored in as a variable cost.

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