Production and cost — Economics STD 12 Humanities & Commerce — Question

1. The average fixed cost falls as more and more units of goods are produced. It is so because average fixed cost is equal to:

 $\text{AFC}=\frac{\text{Total Fixed Cost (TFC)}}{\text{Output}}$

and total fixed cost remains constant with increase in level of output. So, with constant total fixed cost and increasing output, the average fixed cost falls.

2. Average Variable Cost (AVC) is U-shaped with increase in output because of Law of Variable Proportion.

1. As we know the shape of AVC depends upon the shape of Total Variable Cost (TVC). Initially, TVC increases at diminishing rate (because Total Product Increases at increasing Rate); that makes the AVC to fall.
2. Thereafter, TVC increases at increasing rate (because Total Product Increases at diminishing Rate), that makes the average variable cost to rise.
3. So, from inverse S-shape, TVC curve, we derive the U shape AVC curve.