Average Fixed and Variable Cost
Just as we separated total cost into fixed and variable cost, we can also break average cost into fixed and variable components. Average fixed cost (MC) is defined as FC/q. Since total fixed cost is a constant, dividing it by an increasing output gives a steadily
falling .average fixed cost curve [see column (7) of Table 7-3]. In other words, as a firm sells more output, it can spread its overhead cost over more and more units. For example, a software firm may have a large staff of programmers to develop a new graphics program. The number of copies sold does not directly affect how many programmers are necessary thus making them a fixed cost. So if titre program is a best-seller, the APC of the programmers is low; if the program is a failure, their AFC is high.
The dashed gray AFC curve in Figure 7-2(b) is a hyperbola, approaching both axes: it drops lower
(a) Total cost is made up of fixed cost and variable cost.
(b) The blue-colored curve of marginal cost falls and then rises, as indicated by the MC figures given in column
(5) of Table 7-3. Note how MC intersects AC at its minimum.
and lower, approaching the horizontal axis as the constant FC get~ spread over more and more units. If we allow fractional units of q, AFC starts infinitelyhigh as finite FC is spread over ever tinier q. Average variable cost (AVC) equals variable cost divided by output. or AVC = VC/q. As you can see in both Table 7-3 and Figure 7-2(b), for this example AVC first alley and then rises.
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