Page 127 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Average Fixed Cost (AFC)

Average fixed cost is the total fixed cost divided by the number of units of output produced.

Therefore,
TFC
AFC =
Q
Where,
Q represents the number of units of output produced.

Thus, average fixed cost is the fixed cost per unit of output. Since total fixed cost is a constant
quantity, average fixed cost will steadily fall as output increases. Therefore, average fi xed cost

curve slopes downward throughout its length. As output increases, the total fixed cost spreads

over more and more units and, therefore, average fixed cost becomes less and less. When output

becomes very large, average fixed cost approaches zero. Average fixed cost curve, which is a
rectangular hyperbola, showing at all its points, the same magnitude, is shown in Figure 9.2.
Figure 9.2: Per Unit Output Cost Curve
Y
MC

ATC
Average
Cost
Marginal AVC
Cost

AFC
X
0
Q 1 Q 2 Q 3
Quantity

Average Variable Cost (AVC)

Average variable cost is the total variable cost divided by the number of units of output produced.
Therefore,

TVC
AVC =
Q
Thus, average variable cost is the variable cost per unit of output.

We know that the Total Variable Cost (TVC) at any output level consists of payments to the
variable factors used to produce that output. Therefore TVC = P V + P V + …. P V where P
2
1
2
n
n
1
is the unit price and V is the amount of the variable input. Average variable cost for a level of
output (Q), given P is
TVC PV ⎡ V ⎤
AVC = = = P ⎥
⎢
Q Q ⎣ Q ⎦
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