7.5
Average Fixed, Average Variable, and Average Total Cost II
The Average Fixed Cost, or AFC curve, is the graphical representation of the average fixed cost. It starts at the first unit of output. As the level o…
AFC, AVC, and ATC represent average fixed cost, average variable cost, and average total cost.
The Average fixed cost curve starts from its highest point when the output is one unit. Since fixed costs do not change with output, dividing the total fixed cost by an ever higher quantity of output makes the average fixed cost become ever smaller, and the curve falls continuously as output increases.
The Average variable cost curve starts when the output is one unit. At low output levels, a firm experiences increasing returns. However, eventually the firm faces diminishing returns. This pattern of initially increasing and then diminishing returns gives a U-shaped average variable cost curve.
The Average total cost curve is above the Average variable cost curve since it is the summation of the Average fixed cost and Average variable cost.
The average total cost curve keeps declining after the average variable cost curve reaches its minimum point because the average fixed cost decreases with output at a faster rate than the variable costs increase with output. However, finally, the increasing Average variable cost outweighs the decreasing Average fixed cost, causing the Average total cost to rise, giving it a U shape.
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Q1: Why does the average fixed cost curve always slope downward?
The average fixed cost curve slopes downward because fixed costs remain constant regardless of output. As production increases, the same total fixed cost is divided across more units, reducing the cost per unit. This relationship causes the AFC curve to decline continuously and approach zero without ever reaching it.
Q2: What causes the U-shaped pattern in the average variable cost curve?
The average variable cost curve is U-shaped due to changing returns to scale. At low output levels, firms experience increasing returns, lowering average variable costs. Eventually, diminishing returns set in, causing average variable costs to rise. This transition from increasing to diminishing returns creates the characteristic U shape.
Q3: How does average total cost relate to average fixed and average variable costs?
Average total cost is the sum of average fixed cost and average variable cost. Since AFC declines continuously while AVC initially decreases then increases, the ATC curve remains above the AVC curve. The gap between them narrows as output increases because fixed costs spread across more units.
Q4: Why does average total cost eventually increase despite declining average fixed cost?
Average total cost eventually rises because increasing average variable costs eventually outweigh the decreasing average fixed cost. Initially, the declining AFC dominates, keeping ATC falling. However, as diminishing returns intensify, rising AVC eventually exceeds the rate of AFC decline, causing ATC to increase and form its characteristic U shape.
Q5: At what point does the average total cost curve start rising?
The average total cost curve begins rising after the average variable cost curve reaches its minimum point. At this inflection point, the rate of increase in average variable costs surpasses the rate of decrease in average fixed costs. Beyond this point, the upward pressure from AVC dominates, causing ATC to increase.
Q6: How does the gap between ATC and AVC curves change as output increases?
The gap between average total cost and average variable cost curves decreases as output increases. This occurs because average fixed cost continuously declines with higher output levels. Since ATC equals AVC plus AFC, the shrinking AFC reduces the vertical distance between the two curves.
Q7: What is the relationship between average and marginal costs in production?
Understanding how average costs behave requires examining their relationship with marginal costs. When marginal cost falls below average cost, it pulls the average down. When marginal cost rises above average cost, it pulls the average up. This dynamic determines whether average costs are declining or increasing at any output level.