Variable Costs

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.

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