Average Fixed Costs

Average fixed costs (AFC) are calculated by dividing total fixed costs (FC) by the quantity of output produced (Y). They are a fundamental component of average cost. Mathematically, they are expressed as:

AFC = FC / Y

Graphically, the average fixed cost curve is downward-sloping. As output increases, the fixed cost (FC) is spread over a larger number of units (Y), reducing the cost per unit. This results in a declining AFC curve, which is illustrated below:

Fixed costs (CF) remain unchanged in the short run, as production capacity is fixed. Expanding capacity requires investment, which can only be undertaken in the long run. In contrast, variable costs (VC) fluctuate with production levels. When output (Y) increases, fixed costs (CF) are distributed across a greater number of units (Y + ΔY), driving down AFC. This is why the average fixed cost curve is a continuously decreasing function of output.