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Understanding Average Fixed Cost and Average Total Cost in Economics, Lecture notes of Cost Accounting

The concepts of average fixed cost and average total cost in economics. It defines fixed and variable inputs, total fixed costs, average fixed costs, average variable costs, and average total costs. The document also provides a graphic representation of the relationship between these costs and output. It is useful for students studying microeconomics or business economics.

What you will learn

  • What is the relationship between average fixed costs and output?
  • What are fixed inputs in the production process?
  • How are average fixed costs calculated?

Typology: Lecture notes

2021/2022

Uploaded on 09/12/2022

magicphil
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Defining and Graphing Average Fixed Cost and Average Total Cost
The short run is a brief period of time during which only one input can be varied.
Fixed inputs are inputs in the production process that do not change with changes in
output. Examples are machinery and factories.
Variable inputs are inputs that can be changed when output changes. Usually labor is the
only variable input.
Total fixed costs (FC) are short-run costs that that do not vary with output.
Average fixed costs (AFC) are fixed costs divided by total output.
Average variable costs (AVC) are variable costs divided by total output.
Average total costs (ATC) are the summation of AFC and AVC.
All firms have fixed inputs in the short run.
The fixed inputs are usually the factory and
equipment, and the variable input is labor.
To produce output, firms have to combine
fixed and variable inputs, as the graphic on
the left indicates.
Average fixed cost (AFC) is total fixed
cost (FC) divided by total product. Total fixed
costs do not vary with output, but average
fixed costs decrease as total product (TP)
increases.
Geometrically, AFC becomes a rectangular
hyperbola. In other words, as output
approaches infinity, AFC approaches zero.
On the left is the AFC curve showing that it
decreases as output increases.
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Defining and Graphing Average Fixed Cost and Average Total Cost

ª The short run is a brief period of time during which only one input can be varied.

ª Fixed inputs are inputs in the production process that do not change with changes in output. Examples are machinery and factories.

ª Variable inputs are inputs that can be changed when output changes. Usually labor is the only variable input.

ª Total fixed costs (FC) are short-run costs that that do not vary with output.

ª Average fixed costs (AFC) are fixed costs divided by total output.

ª Average variable costs (AVC) are variable costs divided by total output.

ª Average total costs (ATC) are the summation of AFC and AVC.

All firms have fixed inputs in the short run.

The fixed inputs are usually the factory and equipment, and the variable input is labor.

To produce outpu t, firms have to combine fixed and variable inputs, as the graphic on the left indicates.

Average fixed cost (AFC) is total fixed cost (FC) divided by total product. Total fixed costs do not vary with output, but average fixed costs decrease as total product (TP) increases.

Geometrically, AFC becomes a rectangular hyperbola. In other words, as output approaches infinity, AFC approaches zero.

On the left is the AFC curve showing that it decreases as output increases.

To graph average total costs (ATC) , you must get the vertical summation of AFC and AVC. Add the two at each output level and plot the points as shown on left.

The ATC curve lies above the other two because it is the summation of AFC and AVC.

On the left, you can see that it is U-shaped like the AVC curve.