Why does the difference between average total cost and average variable cost decrease as the output is increased? Can these two be equal at any level of output? Explain.
Why does the difference between average total cost and average variable cost decrease as the output is increased? Can these two be equal at any level of output? Explain.
Average Cost (AC) is equal to the sum of Average Variable Cost (AVC) and Average Fixed Cost (AFC).
i.e., AC = AVC + AFC
i.e., AC - AVC = AFC
(AC is greater than AVC by the amount of AFC.)
The vertical distance between AC and AVC curves continues to fall with increase in output becacuse the gap between them is AFC, which continues to decline with rise in output. AFC is given by total fixed cost (which is constant) divided by quantity of output (which is rising). Thus AFC continuously falls.
But, AC and AVC curve never intersect each other as AFC can never equal zero, though it may near zero and remain positive.
This positive value of AFC implies that AVC and AC never intersect.
As shown in the figure, AVC and AC curves tend to meet each other at a later stage, but will never touch each other as the positive value of AFC will keep them apart.
Average Cost (AC) is equal to the sum of Average Variable Cost (AVC) and Average Fixed Cost (AFC).
i.e., AC = AVC + AFC
i.e., AC - AVC = AFC
(AC is greater than AVC by the amount of AFC.)
The vertical distance between AC and AVC curves continues to fall with increase in output becacuse the gap between them is AFC, which continues to decline with rise in output. AFC is given by total fixed cost (which is constant) divided by quantity of output (which is rising). Thus AFC continuously falls.
But, AC and AVC curve never intersect each other as AFC can never equal zero, though it may near zero and remain positive.
This positive value of AFC implies that AVC and AC never intersect.
As shown in the figure, AVC and AC curves tend to meet each other at a later stage, but will never touch each other as the positive value of AFC will keep them apart.
