What are the average fixed cost, average variable cost and average cost of a firm? How are they related?
Beware that fixed cost (i.e., total fixed cost) remains fixed or same at different levels of production. As a result when units of production increase, AFC falls as depicted in Fig.
3.7. Thus AFC decreases as level of output is increased.
(ii) Average Variable Cost. It is per unit variable cost of producing a commodity. It is worked out by dividing the total variable cost by the number of units produced. For instance if total variable cost of manufacturing 100 fans is र 12,500, then:
It should be kept in mind that in the beginning AVC decreases but after reaching the stage of minimum cost, it starts increasing as shown in Fig. 3.7. AVC curve is a dish shaped (U-shaped) curve.
(iii) Average total cost. It is per unit cost of production of a commodity. It is worked out by dividing the total cost (fixed cost + variable cost) by the number of units produced. Continuing the above example if total cost of manufacturing 100 fans is र 20,000 (fixed cost 7,500 + variable cost 12,500), then:
Like total cost which is the sum of total fixed cost and total variable cost, ATC is also the sum of AFC and AVC. Symbolically:
ATC = AFC + AVC
