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Cost Of Production and Concept of Revenue — Economics STD 11 Commerce — Question

Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsCost Of Production and Concept of Revenue2 Marks
Question
What is the meaning of average fixed cost? Give example.
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Answer

Average Fixed Cost $(AFC)$:
The cost of per unit of output is called the Average Fixed Cost $(AFC)$. $AFC$ is obtained by dividing total fixed cost of a firm with total production unit.

$\therefore $ Average Fixed Cost $(AFC) \frac{\text { Total Fixed Cost (TFC) }}{\text { Total Production Unit (TP) }}$

Thus, $AFC = \frac{\text { TFC }}{\text { TP }}$

Example:
  • Fixed cost of a company is $₹ 50,000.$ If the producer produces $1000$ units of a good then,
    Average Fixed Cost $= \frac{50000}{1000} = ₹ 50$
  • Thus, on an average the company bears $₹ 50$ as fixed cost on each unit produced.
Output (units) Total Fixed Cost (in ₹) [TFC] Average Fixed Cost (in ₹) [TFC/output]
$10$ $100$ $10$
$20$ $100$ $5$
$30$ $100$ $3.3$
$40$ $100$ $2.5$
$50$ $100$ $2$
Diagram of average fixed costGraph and curve:
  • Units produced are shown on $X-$axis whereas average fixed cost $(AFC)$ is shown in ₹ on $Y-$axis.
  • When production increases the Total Fixed Cost $(TFC)$ gets distributed among more units and so Average Fixed Cost decreases. Due to the decreasing cost, the average fixed cost curve $(AFC)$ is a downward sloping curve, but it never becomes zero.

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