Variable cost
Also called: Prime cost, Total variable cost, TVC · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Variable cost is the money a firm spends on its variable inputs. Variable inputs are the inputs it can increase or reduce to change output, such as raw materials, power and fuel, and wages of casual labour. It is zero when output is zero, and it rises as output rises. Total cost is the sum of variable cost and fixed cost: TC = TVC + TFC. The TVC curve has an inverse-S shape. It first rises at a falling rate, then at a rising rate. This follows from the law of variable proportions, which says the extra output from each added worker first rises and then falls.
Example
A small garment unit pays nothing for cloth and thread if it makes no shirts. Its bill for them grows as it makes more shirts. In NCERT's Table 3.3, TVC is ₹0, ₹10, ₹18 and ₹24 as output goes from 0 to 3 units.
Don't confuse with
- Fixed cost: stays the same at every output level, even at zero output (rent, interest, salaries of permanent staff). Variable cost is zero at zero output.
- Sunk cost: money already spent that cannot be recovered. Variable cost is not incurred at all if nothing is produced.