Economics Short Run Vs Long Run Costs Questions Medium
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.
In the short run, a firm has both fixed costs and variable costs. Fixed costs are those that do not change with the level of output, such as rent or insurance. Variable costs, on the other hand, vary with the level of output, such as labor or raw materials. In the short run, a firm's AFC will decrease as the quantity of output increases because the fixed costs are spread over a larger number of units.
In the long run, all costs are variable, meaning that a firm can adjust its inputs and production capacity. In the long run, a firm can choose to increase or decrease its fixed costs, such as by investing in new machinery or expanding its facilities. As a result, the relationship between AFC and output in the long run is not as straightforward as in the short run. It is possible for AFC to increase or decrease depending on the firm's decisions regarding fixed costs.
Overall, average fixed cost is an important concept in understanding the cost structure of a firm. It helps to analyze the relationship between fixed costs and output in both the short run and the long run.