Describe the concept of average fixed cost and its relationship with production costs.

Describe the concept of average fixed cost and its relationship with production costs.

Average fixed cost is a measure of the fixed costs incurred per unit of output produced. It is calculated by dividing the total fixed costs by the quantity of output. Average fixed cost decreases as production increases because the fixed costs are spread over a larger number of units. This means that as a firm produces more, the average fixed cost per unit decreases, leading to economies of scale. However, if production decreases, the average fixed cost per unit increases, resulting in diseconomies of scale. Therefore, average fixed cost is inversely related to production costs.