Average fixed cost (AFC)

Definition

Average Fixed Cost (AFC) is the total fixed cost divided by the number of units produced. It decreases as production increases because fixed costs are spread over more units.

5 Must Know Facts For Your Next Test

1. AFC is calculated by dividing Total Fixed Costs (TFC) by the Quantity of output (Q).
2. AFC declines with an increase in production due to fixed costs being constant and spread over more units.
3. AFC is a component of Average Total Cost (ATC), which also includes Average Variable Cost (AVC).
4. In graphical representation, the AFC curve continuously declines but never reaches zero.
5. Understanding AFC helps in determining pricing strategies and profitability.

Review Questions

• How do you calculate Average Fixed Cost?
• Why does Average Fixed Cost decrease as production increases?
• What role does AFC play in calculating Average Total Cost?

Related terms

Total Fixed Costs (TFC): The sum of all costs that do not change with the level of output.

Average Variable Cost (AVC): The total variable cost divided by the number of units produced.

Average Total Cost (ATC): The sum of average fixed cost and average variable cost for each unit produced.