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Question
Explain the shapes of AFC and AVC curves with the help of a diagram.
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Solution
The AFC curve slopes downward from left to right, indicating a continuous decline in average fixed cost as output increases. The curve is asymptotic to both the X-axis and Y-axis, meaning it gets closer to the axes but never touches them.
This curve reflects that average fixed cost decreases with rising output, as the total fixed cost is distributed over a greater number of units. However, since some fixed cost always exists, the average fixed cost can never become zero.
The average variable cost (AVC) initially declines and then starts to rise. This pattern is represented by the AVC curve.
The curve slopes downward up to the OQ level of output, indicating a fall in average variable cost.
Beyond the OQ output level, the curve slopes upward, reflecting a rise in average variable cost.
