Such expenses as labor costs, gasoline, truck maintenance, and office supplies will be positively related to the amount of business your sand-and-gravel operation does.

Variable costs are costs incurred when a firm produces, which vary with the level of production.

 

            Any costs that are incurred only when a firm produces are variable costs. Consider the data for your business in Table 2 and Figure 2. Labor is the only variable resource in the short run, and we will assume that you can hire all you need at $50 each per 8-hour shift (the supply of workers is perfectly elastic). All other resources and costs are assumed constant, and total fixed cost is assumed to be $100 per day.

 

Table 2 Total Output, Total Costs, and Fixed and Variable Costs (Sand and Gravel Example)

 

(1)   Workers per 8-hr Shift (L)	(2)   Tons of Sand & Gravel Removed Daily (q)	(3)   Wages per worker ($) (8 hrs. Daily) (w)	(4)   Total Variable Cost ($) (w x L) (TVC)	(5)   Total Fixed Cost ($) (TFC)	(6)   Total Costs ($) (TVC+TFC=TC)
0	0	50	0	100	100
1	10	50	50	100	150
2	22	50	100	100	200
3	36	50	150	100	250
4	52	50	200	100	300
5	70	50	250	100	350
6	86	50	300	100	400
7	100	50	350	100	450
8	112	50	400	100	500
9	122	50	450	100	550
10	130	50	500	100	600
11	137	50	550	100	650
12	143	50	600	100	700
13	148	50	650	100	750
14	152	50	700	100	800
15	155	50	750	100	850
16	157	50	800	100	900
17	158	50	850	100	950
18	158	50	900	100	1000
19	157	50	950	100	1050

           

The total physical product curve (TPP) in Figure 1 shows the amounts of labor (L) required to produce varying levels of output. When we multiply the horizontal (labor) axis of Figure 1 by the wage rate (w), it becomes the total wage bill (w ´  L) incurred for each level of labor you might hire. (Basic relationships are unchanged when any function is multiplied by a constant.) Wages are the only variable costs of production, so this wage bill equals total variable cost (TVC is column 4 in Table 2). Thus, the relationship between the quantity of output and total variable costs is the TVC curve in Figure 2.

 

            When total fixed costs (TFC) are added vertically to the TVC (wage bill) curve, we have a picture of how your total costs (TC) vary with output. Total fixed costs are unaffected by production (a constant $100). We need to explore costs a bit more, however, before we launch into decision making.

 

    Variable costs reflect wages to labor, and labor employed determines the amount of output, so there is a natural, tight link between total cost, production, and the amount of labor hired. Now we will explore other costs that are closely related to labor's average and marginal products.