Fixed costs are those which are independent of output that is they do not change with changes in output. These costs are a fixed amount which must be incurred by a firm in the short run whether output is small or large. Even if the firm closes down for some tie in the short run but remains in business these costs have to be borne by it. Fixed costs are also known as overhead costs and include changes such as contractual rent insurance fee maintenance costs property taxes interest on the capital invested minimum administrative expense such as mange salary watchman’s wages etc. thus fixed cost are those which are incurred in hiring the fixed factor of production whose amount cannot be altered in the short run.
Variable Costa on the other hand is those costs which are incurred o the employment of variable factors of production whose amount can be altered in the short run. Thus the total variable costs change with changes in output in the short run they increase or decrease when the output rises or falls. These costs include payments such as wages of labour employed price of the raw materials fuel and power used, the expenses incurred on transporting and the like. If a firm shuts down for some time in the short run, then it will not use the variable factors of production and will not therefore insure any variable costs increase with the increase in the level of production. Variable costs are also called prime costs or direct costs. Total coats fo a business is the sum of its total variable costs and total fixed costs. Thus
TC = TFC + TVC
Where TC stands for total cost TFC for total fixed cost and TVC for total variable cost,
Because one component the total variable cost (TVC) varies with the changes in output the total cost of production (TC) will also change with the changes in the level of output. The total cost increases as the level of output rises.
It should be noted that total cost (TC) is a function of total output (Q) the greater the output the greater will be the total cost in symbols we can write
TC = f(Q)
Where Q stands for output
We can prove this as follows
TC = TFC + TVC.