Question

What are the average fixed cost, average variable cost and total cost of a firm? How are they related?

Solution

Average Fixed Costs (AFC): Average fixed cost refers to the per unit fixed cost of production. It is calculated by dividing TFC by total output i.e., AFC=TFCQ where, AFC = Average Fixed Cost TFC = Total Fixed Cost Q = Quantity of output. Average Variable Cost (AVC): Average variable cost refers to the per unit variable cost of production. It is calculated by dividing TVC by total output. AVC = TVC / Q where AVC = Average Variable Cost TVC = Total Variable Cost Q = Quantity of output Average Total Cost (ATC) Or Average Cost (AC): Average cost refers to the per unit total cost of production. It is calculated by dividing TC by total output. AC = TC / Q where AC = Average Cost TC = Total Cost Q = Quantity of output Average cost is also defined as the sum of average fixed cost and average variable cost. AC= AFC + AVC Like AVC, average cost also initially falls with increase in output. Once the output rises to the optimum level, AC starts rising.

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