Pricey Raw Materials Causes a Rise in Beer Production Costs

The price of beer production is set to increase as the price of raw materials for beer production increases as well. Using our understanding of Economics and Cost vs Output, we can represent this shift. In Figure 1, TVC represents the Total Variable Cost, which is graphed as price over output.. The raw materials costs for the production of beer are variable costs, as they can change based on the market. Variable costs are subjected to the three major laws of cost output: Increasing Return, Constant Return and Diminishing Return. Increasing Return states that as the initial units of variable cost (those directly proceeding the costs origin) produce a large return for a small increase in cost. In Figure 1, this is represented by the steep curve projecting from the graphs origin. Following this, Constant Return shows an equal increase in output for every unit of variable cost added. This is represented by the linear section of the graph following the area of Increasing Return. Finally, the law of Diminishing Return states that at a certain point, for every unit of variable cost added, the output is less. On Figure 1 this is represented by the rising curve toward the right of the TVC curve.

In Figure 1, the rise in the price of raw materials for beer is represented with the shift from TVC to TVC1. From this shift, we see that the initial variable cost remains at 0, as both TVC curves cut the axis’ at 0. However, due to the increase in price of raw materials, the TVC1 curve rises above the initial TVC curve representing higher prices for equal output between the two lines.