Economics Short Run Vs Long Run Costs Questions Long
Average fixed cost (AFC) is a measure of the fixed cost per unit of output produced. It is calculated by dividing the total fixed cost by the quantity of output. AFC decreases as the quantity of output increases because the fixed cost is spread over a larger number of units.
The relationship between average fixed cost and marginal cost (MC) is that they both contribute to the overall cost structure of a firm, but they represent different aspects of cost. While AFC represents the fixed cost component, MC represents the additional cost incurred by producing one more unit of output.
In the short run, where some factors of production are fixed, AFC will decline as output increases due to the spreading effect. This is because the fixed cost remains constant regardless of the level of output, so as more units are produced, the fixed cost is divided among a larger number of units, resulting in a decrease in AFC. However, MC may initially decrease due to economies of scale, but eventually, it will start to increase due to diminishing returns. This means that producing additional units becomes more costly as the firm reaches its capacity limits.
In the long run, all factors of production are variable, and therefore, there are no fixed costs. As a result, AFC becomes zero, as there are no fixed costs to be spread over the output. In this case, MC represents the entire cost structure of the firm. It is important to note that in the long run, firms can adjust their production levels and change their cost structure, allowing them to optimize their operations and minimize costs.
In summary, average fixed cost represents the fixed cost per unit of output, and it decreases as output increases due to the spreading effect. Marginal cost, on the other hand, represents the additional cost incurred by producing one more unit of output. While AFC decreases, MC may initially decrease but eventually starts to increase due to diminishing returns. In the long run, AFC becomes zero as all costs become variable, and MC represents the entire cost structure of the firm.