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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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