A firm can avoid variable cost in the short run by reducing production to zero. This bit of information often comes in handy when the price received by a firm is so low that it falls short off covering variable cost at any positive quantity of production. As such, the firm might find it most "profitable" to cut losses by shutting down production and avoiding variable cost, until the price increases.

Variable Inputs

While labor is usually isolated as THE variable input in the short run, most short-run production has other variable inputs, too. The Wacky Willy Company uses an assortment of other variable inputs, all of which are part of variable cost--including cuddly cloth, squeezeably soft stuffing, and thread that make up the Stuffed Amigos; electricity needed to run the machinery; and boxes, plastic wrapping, and other packing materials used to ship the Stuffed Amigos to customers. When The Wacky Willy Company makes more Stuffed Amigos, they incur a greater cost for these variable inputs.

The Cost of Stuffed Amigos

Total Variable Cost

The center column is the total variable cost of producing each quantity, which is exactly $0 if no Stuffed Amigos are produced and rises to $43 if 10 Stuffed Amigos are produced. This is the essence of variable cost. Greater production entails greater total variable cost.

• The most obvious point is that total variable cost increases with increased production. Producing more Stuffed Amigos means higher total variable cost. This makes sense. To produce more Stuffed Amigos, The Wacky Willy Company needs to hire more labor and buy more materials. Because these inputs incur a cost, total variable cost rises with extra production.


• Moreover, total variable cost is zero when no Stuffed Amigos are produced. The Wacky Willy Company incurs no variable cost when they employ no workers and buy no materials--their variable inputs.


• A last note is that the incremental increase in total variable cost is NOT the same for each quantity. In other words, total variable cost does not rise at a constant rate. This incremental change in total variable cost reflects marginal cost, a key concept in the short-run production and supply decision of a firm.

The Total Variable Cost Curve

Total Variable Cost Curve

The most striking feature of the total variable cost curve is its shape. The total variable cost curve emerges from the origin, then twists and turns its way to $43. This curve begins relatively steep, then flattens, before turning increasingly steep once again.

The slope of the total variable cost curve flattens as the first four Stuffed Amigos are produced due to increasing marginal returns found in Stage I of production. The slope of the total variable cost curve becomes increasingly steeper after the fourth Stuffed Amigo is produced. This range of output corresponds with decreasing marginal returns, and the extremely important law of diminishing marginal returns, found in Stage II of production.

Average Variable Cost

The connection between total variable cost and average variable cost is mathematically represented by this equation:

average variable cost

=

total variable cost quantity of output

A Fixed Alternative

The connection between total cost, total variable cost, and total fixed cost is often summarized in this handy equation:

total cost

=

total fixed cost + total variable cost