Question

Can someone please explain to me in detail why average fixed cost curve is downward? Also what is the relationship between average fixed cost and average cost. Also explain the relationship between average cost and marginal cost and how it affects the efficient scale.

Answer 1

Fixed cost is a constant cost which would not vary with the increase or decrease in production level. So average fixed cost starts to decrease with the increase in production level and hence it would be downward sloping.

Average fixed cost and average cost starts to decrease with the increase output, but average cost after reaching the minimum point, it then starts to increase. So after reaching the minimum average cost, average fixed cost are inversely related.

Marginal cost and average cost are positively related, with the increase in output, both starts to decrease, reaches a minimum and then it starts to increase. The output attains efficient scale at the minimum point of average cost curve and the cost starts to increase with the increase in output leading to diseconomies of scale