Economics Cost Of Production Questions Medium
Average fixed cost in production refers to the fixed cost per unit of output produced. Fixed costs are expenses that do not vary with the level of production, such as rent, insurance, and salaries. To calculate average fixed cost, the total fixed cost is divided by the quantity of output produced.
Mathematically, average fixed cost (AFC) is calculated as:
AFC = Total Fixed Cost / Quantity of Output
For example, if a company has a total fixed cost of $10,000 and produces 1,000 units of output, the average fixed cost would be $10 per unit ($10,000 / 1,000 units).
Average fixed cost is inversely related to the level of production. As the quantity of output increases, the average fixed cost decreases. This is because the fixed costs are spread over a larger number of units, resulting in a lower cost per unit.
Understanding average fixed cost is important for businesses as it helps in determining the breakeven point, which is the level of production at which total revenue equals total cost. By analyzing the average fixed cost, businesses can make informed decisions regarding pricing, production levels, and profitability.