TVC represents the cost of those factors that vary directly with output. In our example
these are labour costs. Other variable costs could include the cost of raw materials
and power. A TVC curve is illustrated in Figure 5.5a. The curve starts from the origin
as there are no variable costs at zero output. As output rises, TVC rises. Note the connection
between the shape of the TVC curve and the TP curve in Figure 5.4a in that if
we assume labour the only variable cost, the axes on Figure 5.5 are the reverse of those
in Figure 5.4a. Output switches to the horizontal axis on Figure 5.5 and whereas
labour units were plotted on the horizontal axis in Figure 5.4a, labour costs (equal to
TVC) are now plotted on the vertical axis on Figure 5.5. As the axes have switched, the
142 SECTION 2 · DEMAND AND SUPPLY
principle of
diminishing
returns the idea
that as more units
of a variable factor
are combined with
a given number of
fixed factors, there
comes a point
where the returns
to the variable
factor begins to
decline
5.6 Short-run cost
total cost the total
of a firm’s fixed and
variable costs
incurred in
production
total fixed costs
those costs of
production which
do not vary with
output
total variable cost
those costs of
production which
do vary with output
overhead costs
unavoidable costs
in a business
TVC curve is the inverse shape of the TP curve. The rationale for the shape of the
TVC curve is therefore the same as that of the TP curve. For example, with TP
increasing at an increasing rate, TVC increases at a decreasing rate. That is, the
increasing marginal productivity of labour means that additional units of output use
proportionally less labour. Total labour costs (TVC) are therefore increasing at a
decreasing rate. Once diminishing returns set in, and TP increases at a decreasing
rate, additional units of output use proportionally more labour. The total wage bill
(TVC), then increases at an increasing rate relative to the increase in output.