Short Run Cost Relations

Relations among short-run cost categories are shown in Figure 8.1. Figure 8.1(a) illustrates total cost and total variable cost curves. The shape of the total cost curve is determined entirely by the total variable cost curve. The slope of the total cost curve at each output level is identical to the slope of the total variable cost curve. Fixed costs merely shift the total cost curve to a higher level. This means that marginal costs are independent of fixed cost.

The shape of the total variable cost curve, and hence the shape of the total cost curve, is determined by the productivity of variable input factors employed. The variable cost curve in Figure 8.1 increases at a decreasing rate up to output level Qv then at an increasing rate. Assuming constant input prices, this implies that the marginal productivity of variable inputs first increases, then decreases. Variable input factors exhibit increasing returns in the range from 0 to Q1 units and show diminishing returns thereafter. This is a typical finding. Fixed

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