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economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, average fixed cost (AFC) is the fixed cost
In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or r ...
s of production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
(FC) divided by the quantity (Q) of output
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the value of ...
produced. Fixed costs are those costs that must be incurred in fixed quantity regardless of the level of output produced.
:
Average fixed cost is fixed cost per unit of output. As the total number of units of the good produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.
Average variable cost
In economics, average variable cost (AVC) is a firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with the output level:
:\text = \frac
where \text = variable cos ...
plus average fixed cost equals average total cost In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):
AC=\frac.
Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale ...
:
:
Explanation
Example 1
Assume a firm produces clothing. When the quantity of the output varies from 5 shirts to 10 shirts, fixed cost would be 30 dollars. In this case, average fixed cost of producing 5 shirts would be 30 dollars divided by 5 shirts, which is 6 dollars. In other words, when 5 shirts are produced, 30 dollars of fixed cost would spread and result in 6 dollars per shirt. Similarly, average fixed cost of producing 10 shirts would be 3 dollars derived from 30 dollars divided by 10 shirts.
Example 2
In Example1, there was no information about average total cost and average variable cost. If the firm knows average total cost and average variable cost, it is possible to find the same result as Example 1. Because average total cost is average variable cost plus average fixed cost, average fixed cost is average total cost minus average variable cost. If producing 5 shirts generates average total cost of 11 dollars and average variable cost of 5 dollars, fixed cost would be 6 dollars. Similarly, the firm produces 10 shirts and average total cost and average variable cost is 10 dollars and 7 dollars respectively. In this case, average fixed cost would be 3 dollars.See also
*Average variable cost
In economics, average variable cost (AVC) is a firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with the output level:
:\text = \frac
where \text = variable cos ...
*Average cost In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):
AC=\frac.
Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale ...
Reference