7.5 : Average Fixed, Average Variable, and Average Total Cost II

AFC, AVC, and ATC represent average fixed cost, average variable cost, and average total cost.

The Average fixed cost curve starts from its highest point when the output is one unit. Since fixed costs do not change with output, dividing the total fixed cost by an ever higher quantity of output makes the average fixed cost become ever smaller, and the curve falls continuously as output increases.

The Average variable cost curve starts when the output is one unit. At low output levels, a firm experiences increasing returns. However, eventually the firm faces diminishing returns. This pattern of initially increasing and then diminishing returns gives a U-shaped average variable cost curve.

The Average total cost curve is above the Average variable cost curve since it is the summation of the Average fixed cost and Average variable cost.

The average total cost curve keeps declining after the average variable cost curve reaches its minimum point because the average fixed cost decreases with output at a faster rate than the variable costs increase with output. However, finally, the increasing Average variable cost outweighs the decreasing Average fixed cost, causing the Average total cost to rise, giving it a U shape.