Explain the concept of average fixed cost and its calculation.

Explain the concept of average fixed cost and its calculation.

Average fixed cost refers to the fixed cost per unit of output produced by a firm. It is calculated by dividing the total fixed cost by the quantity of output produced.

The formula for calculating average fixed cost is:

Average Fixed Cost = Total Fixed Cost / Quantity of Output

For example, if a firm has a total fixed cost of $10,000 and produces 1,000 units of output, the average fixed cost would be:

Average Fixed Cost = $10,000 / 1,000 = $10 per unit

This means that for each unit of output produced, the firm incurs an average fixed cost of $10. Average fixed cost is important for firms to understand as it helps in determining the breakeven point and making decisions regarding pricing and production levels.