The Total Costs of Production

(total cost of producing 15 pairs of jeans per day)

The total cost of producing a good equals the market value of all the resources used in its production. In this case, we have assumed that the production of 15 pairs of jeans per day requires resources worth $245.

enough denim for 10 pairs of jeans. In other words, one-tenth of a bolt ($3 worth of material) is required for one pair of jeans. We shall ignore any other potential expenses. With these assumptions, the total cost of producing 15 pairs of jeans per day amounts to $245, as shown in Table 2.

Total costs will change, of course, as we alter the rate of production. But not all costs increase. In the short run, some costs don't increase at all when output is increased. These are fixed costs, in the sense that they do not vary with the rate of output. The factory lease is an example. Once you lease a factory, you are obligated to pay for it, whether you use it or not. The person who owns the factory wants $100 per day, whether you produce any jeans or not. Even if you produce no jeans, you still have to pay the rent. That is the essence of fixed costs.

The leased sewing machine is another fixed cost. When you rent a sewing machine, you must pay the rental charge. It doesn't matter whether you use it for a few minutes or all day long — the rental charge is fixed at $20 per day.

Labor costs are another story altogether. The amount of labor employed in jeans production can be varied easily. If we decide not to open the factory tomorrow, we can just tell our only worker to take the day off. We will still have to pay rent, but we can cut back on wages. On the other hand, if we want to increase daily output, we can also get additional workers easily and quickly. Labor is regarded as a variable cost in this line of work — that is, a cost that varies with the rate of output.

The denim itself is another variable cost. Denim not used today can be saved for tomorrow. Hence how much we "spend" on denim today is directly related to how many jeans we produce. In this sense, the cost of denim input varies with the rate of jeans output.

Figure 5 illustrates how these various costs are affected by the rate of production. On the vertical axis are the costs of production, in dollars per day. Notice that the total cost of producing 15 pairs per day is still $245, as indicated by point B. This figure consists of $120 of fixed costs (factory and sewing machine rents) and $125 of variable costs ($80 in wages and $45 for denim). If we increase the rate of output, total costs will rise. How fast total costs rise depends on variable costs only,however, since fixed costs remain at $120 per day. (Notice the horizontal fixed cost curve in Figure 5.)

With one sewing machine and one factory, there is an absolute limit to daily jeans production. The capacity of a factory with one machine is roughly 51 pairs of jeans per day. If we try to produce more jeans than this by hiring additional workers, our total costs will rise, but our output will not. In fact, we could fill the factory with garment workers and drive total costs sky-high. But the limits of space and one sewing machine do not permit output in excess of 51 pairs per day. This limit to productive capacity is represented by point G on the total cost curve. Further expenditure on inputs will increase production costs but not output.

Although there is no upper limit to costs, there is a lower limit. If output is reduced to zero, total costs fall only to $120 per day, the level of fixed costs. This is illustrated by point A in Figure 6. As before,there is no way to avoid fixed costs in the short run.

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