Average Fixed Cost (AFC) represents the fixed cost per unit of output. It is calculated by dividing the total fixed costs by the total quantity produced.
Formula:
AFC = TFC / Q
(Where TFC is Total Fixed Costs and Q is the Quantity of output produced)
Key Characteristics:
- AFC decreases as production increases because the fixed costs are spread across a larger number of units.
- The AFC value approaches zero as output becomes very high, but it never reaches zero.
Shape of the AFC Curve:
- It is shaped like a rectangular hyperbola.
- The curve falls continuously and gets closer to the x-axis without ever touching it.
Example:
If your Total Fixed Cost (TFC) is £1,000:
- At 10 units: AFC = £100 (£1,000 / 10)
- At 100 units: AFC = £10 (£1,000 / 100)
- At 1,000 units: AFC = £1 (£1,000 / 1,000)
Importance:
- It demonstrates how fixed expenses become less costly per unit as you produce more.
- It is a key part of calculating the Average Total Cost (ATC), where ATC = AFC + Average Variable Cost (AVC).