Why does average fixed cost decrease

Average fixed cost is the fixed cost per unit of output. Average fixed cost curve slopes downward to the right. It shows that AFC decreases as output increases.

Mass of a body is defined as the quantity of matter contained in it. Since, all bodies are made up of certain matter. Thus the fixed cost refers to the fixed expenses per unit of production by the company. The curve of the AFC will slope downwards continuously, from left to right. When there is an increase in the production of the company, then the average fixed cost of the company falls. So, there is the advantage of the rise in the output, and the profit of the company, in that case, will be more.

However, when there is a decrease in the production of the company, then the average fixed cost of the company increases, leading to a reduction in the profits of the company. This has been a guide to what is Average Fixed Cost and its definition.

Here we discuss how to calculate the average fixed cost using its formula along with examples, advantages, and disadvantages. You may learn more about finance from the following articles —. Your email address will not be published. Step 1: Aggregate all the fixed costs to find out the total fixed costs.

Step 2: Find out the number of units produced. The steps to calculate the average fixed cost in such a scenario are: Step 1: Find out the total variable cost. Step 3: Find out the average total cost using the equation. Relevance and Uses In managerial economics, a graph of average fixed costs is prepared by the decision-makers.

The graph of average fixed costs is plotted with quantity on the horizontal axis and costs on the vertical axis. Other variables like input prices and taxes are kept constant while making the graph. We have a constantly declining average fixed cost curve. It is negatively sloped. As there is an increase in the production volume, the average fixed cost tends to reduce. The reason is that the fixed costs are spread over a larger quantity of output.

This is known as economies of scale. Hence, in order to reduce per-unit costs, an organization should go for an increase in production volume. It is important to keep in mind the concept of economies of scale while determining pricing policies.

It even finds its application in strategic planning. Fixed costs remain constant in the short run. Average fixed cost. Variable Cost. Average variable Cost. Total Cost. Average total cost ATC. Marginal Cost MC.