What are the average fixed cost, average variable cost and average cost of a firm? How are they related?

Average fixed cost is per unit cost on fixed factors, it decreases with increase in output.

Average fixed cost = Total Fixed Cost / No. of Units Produced

Cost Schedule

Graph

Average variable cost is per unit cost of variable factors it remains constant.

Average variable cost = Total Variable Cost / No. of Units Produced

Cost Schedule

Graph

Average total cost means total cost per unit of output it is a u shaped curve like average variable cost. The average fixed cost is represented by a rectangular hyperbola

Average total cost = Total Cost / No. of Units Produced

Cost Schedule

Graph

Relationship between Average Fixed Cost, Average Variable Cost, and Average Cost -

• Average fixed cost curve is rectangular hyperbola.

• It falls continuously to the right but will never touch the x-axis because average fixed cost can never be zero.

• Average variable cost and average total cost or average cost curve is U shaped.

• Average cost curve lies above average variable cost curve and as output increases the vertical difference between two curves will decrease but they will never intersect.