7.4 : Average Fixed, Average Variable, and Average Total Cost I

Average Fixed Cost (AFC) is the total fixed cost per unit of output. It's calculated by dividing the total fixed costs (TFC) by the quantity of output produced. Since TFC does not change with the level of output, the AFC continuously decreases as output increases. This is because the same amount of TFC is spread over an ever larger number of units. For example, if the total fixed costs for a business are $1,000 and it produces 100 units, the AFC would be $10 per unit. If production increases to 200 units, the AFC drops to $5 per unit.

Average Variable Cost (AVC) is the total variable cost per unit of output. It is calculated by dividing the total variable costs (TVC) by the quantity of output produced. It is calculated by dividing the total variable costs (TVC) by the quantity of output produced.

Average Total Cost (ATC) is the total cost per-unit of output. It is calculated by dividing the total cost (TC) by the quantity of output produced. ATC can also be calculated as the sum of the AFC and AVC. The firm makes an economic profit if the selling price per unit exceeds the ATC. If the price equals ATC, the firm breaks even.

Average Variable Cost (AVC) is the total variable cost per unit of output. It is calculated by dividing the total variable costs (TVC) by the quantity of output produced. In the short run, the firm changes from increasing returns to decreasing returns. This impacts the shape of the marginal cost curve, which in turn impacts the shape of the AVC curve. Specifically, when MP_L initially is increasing with output, the firm experiences increasing returns. This causes marginal cost (MC) to fall as output increases, starting at a level lower than AVC. In turn, the AVC curve then falls as output increases. Eventually, MP_L begins to decrease with output, and the firm experiences decreasing returns. This causes MC to rise with output. When MC eventually exceeds AVC, the AVC curve begins to increase as output increases.

Average Total Cost (ATC) is the total cost per-unit of output. It includes total fixed and total variable costs. It is calculated by dividing the total cost (TC) by the quantity of output produced. ATC can also be calculated as the sum of the AFC and AVC. ATC is also U-shaped due to the same relationship between the MC curve as the AVC curve.