Question

Explain the shapes of the average cost curves.

Answer 1

1. Average Fixed Cost (AFC):
   1. The AFC curve is downward sloping.
   2. This is because fixed costs remain constant, but as output increases, the same fixed cost is spread over more units.
   3. Therefore, AFC gets smaller and smaller as output increases, but it never touches the X-axis (it never becomes zero).
2. Average Variable Cost (AVC):
   1. The AVC curve is U-shaped.
   2. It first falls as output increases (due to better use of variable inputs), then rises after a point (due to overuse or inefficiency).
   3. This happens because of the law of variable proportions.
3. Average Total Cost (ATC):
   1. The ATC curve is also U-shaped, and it lies above the AVC curve.
   2. ATC = AFC + AVC. Since AFC keeps falling and AVC first falls and then rises, the ATC also falls at first, reaches a minimum, and then rises.