Average Fixed Cost: Definition, Formula, Example, Curve (2024)

FAQs

Average Fixed Cost: Definition, Formula, Example, Curve? ›

The average fixed cost (AFC) is the fixed cost that does not change with the change in the number of goods and services produced by a company. To put it in a nutshell, the average fixed cost (AFC) is the fixed cost per unit and is calculated by dividing the total fixed cost by the output level.

Obtain the total quantity of products produced within the chosen period: The total quantity of goods produced should be within the same period for which the costs were accrued. Divide the total fixed cost by the quantity produced: This will give you the average fixed cost per unit.

The average total cost curve is typically U-shaped. Average variable cost (AVC) is calculated by dividing variable cost by the quantity produced. The average variable cost curve lies below the average total cost curve and is typically U-shaped or upward-sloping.

Consider a factory, serving 40 coffee cups at 320$. The average total cost of producing each of 40 coffee cups is 320$ / 40 = 8$ per coffee. The average cost curve is generally a U shaped curve, where the Average Total Cost is relatively high, because at a low level of outputs total costs are more than the fixed costs.

Answer and Explanation:

AFC (average fixed cost) is the slope of the TFC (total fixed cost) curve. TFC is horizontal as fixed costs do not change. So, AFC has a shape of a rectangular hyperbola. This depicts decreasing fixed costs with an increase in output level.

The average fixed costs AFC curve is downward sloping because fixed costs are distributed over a larger volume when the quantity produced increases. AFC is equal to the vertical difference between ATC and AVC. Variable returns to scale explains why the other cost curves are U-shaped.

Total fixed cost curve depicts the relation between the total fixed cost of production and the level of output while other things being constant. Since total fixed costs are fixed, the curve representing it, is a horizontal line.

The statement that the slope of the Average Fixed Cost (AFC) curve is always negative is correct. The AFC curve is downward sloping because as the quantity of output increases, the fixed cost is spread over a larger quantity, leading to a decrease in AFC. Therefore, the slope of the AFC curve is negative.

Fixed costs, by definition, do not vary with the level of activity (e.g., output). Thus, the average fixed cost curve will be convex and downward sloping with respect to the activity level.

Total cost means the sum of all costs, including fixed and variable costs. Therefore, average Cost is also often called the total cost per unit or the average total cost. For example, if a company produces 1,000 widgets at a total cost of $10,000, the average cost per widget would be $10 ($10,000 ÷ 1,000 widgets).

What is the formula for the cost curve? ›

Short-run average variable cost curve (AVC or SRAVC)

Average variable cost (AVC/SRAVC) (which is a short-run concept) is the variable cost (typically labor cost) per unit of output: SRAVC = wL / Q where w is the wage rate, L is the quantity of labor used, and Q is the quantity of output produced.

For a planar curve with reverse curvature the average of the curvature magnitude can be calculated by dividing the curve at inflection points and summing the magnitude of the differences in direction.

A typical average cost curve has a U-shape, because fixed costs are all incurred before any production takes place and marginal costs are typically increasing, because of diminishing marginal productivity.

The average fixed cost (AFC) curve is a rectangular hyperbola. The area under the curve is constant because TFC is constant at all levels of output.

The average fixed cost in a company is the fixed cost per unit. It is calculated by dividing the fixed production cost by the quantity of output produced.

ATC = TC / Q

This concludes the topic on Average total cost formula, which is a very important concept for making pricing decisions in a business.

Total Fixed Cost TFC:- The total amount of money spends on fixed factors of production is called fixed cost.It can be obtained by subtracting total variable cost from total costTFC = TC - TVCTotal Variable Cost TVC:- The total amount of money spends on variable factors of production is called total variable cost.

Total fixed cost does not vary with output. As output increases, the average fixed cost will always decrease, so the average fixed cost curve is always downward sloping.