Average Cost of Production

Note that TFC does not change when output changes, but Q can changes even in the short run. Therefore, AFC changes in opposite direction compared to Q, but in the same proportion. This means that in the short run, output elasticity of AFC is equal to negative unity
 


However, the total variable costs and therefore, average variable costs can vary depending upon output changes. As more and more variable factors are used, the returns to available factors may increase (decreasing costs), then remain constant (constant costs) and ultimately decrease (increasing costs). Accordingly, the AVC first falls, then remains constant and finally starts going up; in the short run, the increasing cost phase is more pronounced than anything else.

It may be noted that as more and output is produced, the fixed costs get spread over a large volume, but variable costs start going up because of diminishing returns of factor. It is the aggregate of average fixed costs (AFC) and average variable costs (AVC) which decides (total) average costs (AC).

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