Average Fixed and Average Variable Cost, Business Economics Assignment Help

Business Economics - Average Fixed and Average Variable Cost, Business Economics

Average Fixed Cost

Average fixed cost is the total fixed cost divided by the number of unties of output produced. Therefore,

AFC = TFC / Q                            

Where Q represents the number of units of output produced

Thus average fixed cost is the fixed cost per unit of output. fixed cost is a constant quantity average fixed cost will steadily fall as output increase therefore

The average fixed cost curve AFC possesses another important property. If we pick up any point on the average fixed cost curve and multiply the average fixed cost at that point with the corresponding quantity of output produced then the product is always the same. This is because corresponding quantity of output produced then the product is always the same. This is because the product of the average fixed cost and the corresponding quantity of output will yields total fixed cost which remains constant throughout. A curve with such a property is called rectangular hyperbola.

Average Variable Cost

The average cost is the variable cost per unit of output. It is obtained by dividing the total variable cost by the total output.

 

AVC = (Total Variable Cost / Output) = TVC/Q

 

 

Or AVC = ATUC - AFC

 

AVC is explained in the following table and diagram:

 

Output (in units)  

TFC (In Rs.)         AVC (In Rs.)

0              0              -

1              40           40/1 = 40

2              60           60/2 = 30

3              80           80/3 = 26.6

4              120         120/4 = 30

5              180         180/5 =36

Behavior of Average Variable Cost (AVC)

 

(1) It will be observed from the above table that Average Variable Cost declines initially upto 26.6 its minimum point. After that it starts rising. It shows that in the initial stages law of decreasing cost (law of increasing return to variable factor) is applying; finally the operation of law of increasing cost or diminishing return is clearly visible.

(2) AVC curve is always U-shaped (dish shaped) showing the behavior of declining cost in the initial stages and finally.

(3) AVC shows almost the tendency of AVC, TVC like is also based upon the laws of return.

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