Total cost is the amount spent on producing a given amount of a good. The total cost can be calculated by

Total Costs = Total Fixed Costs + Total Variable Costs

The fixed costs are those costs that do not vary as the level of production changes. In other words, they are independent of output, they are the same if the firm produced 1 good or 1000 goods.

The variable costs are those costs that vary in proportion to the level of output. In other words, the higher the output the higher the variable costs.

The variable costs cause the total costs curve to be upward sloping. The greater the output the higher he costs. The exact shape depends on the nature of the variable costs and how they change with output.

For instance, they may increase at a constant rate

A further development is the inclusion of the principle of diminishing returns. This economic principle will affect the shape of the variable and total cost curves.

Economists however, argue that as output is increased in the short-run, the pattern of variable costs will change. Initially, there may be increasing returns as more of the variable factor is employed. However, eventually the firm will suffer from diminishing returns as more and more variable factors are applied to the same level of fixed factors. This will mean a greater increase in costs to get the same increase in output. The effect of this on the total cost curve is to make it 's-shaped' as illustrated below. When there are increasing returns total cost increases at a decreasing rate. However, once diminishing returns set in total cost starts to increase at an increasing rate.