Question

What is the relation between average cost , average total cost and average fixed cost?

Answer 1

Let me first explain the reason behind the shape of the Average variable cost (AVC) curve. The average variable cost is variable cost per unit of output. The average variable cost normally falls as output increases from zero to normal capacity due to occurrence of increasing returns. But beyond the normal capacity output, average variable cost rises steeply because of the operation of diminishing returns. Therefore, the average variable cost curve intially falls, then reaches a minimum and then rises.

On the other hand, average total cost (ATC) is the sum of average fixed cost (AFC) and average variable cost (AVC). In short, ATC= AFC + AVC. The shape and behaviour of ATC curve depands upon the behaviour of AFC curve and AVC curve. Initially, both the AFC curve and the AVC curve fall because of which the ATC curve too falls. But after a certain phase the AVC curve begins to rise, as I explained in the above paragraph, but the AFC curve continues to fall steeply, and therefore the ATC curve continues to fall. This happens due to the fall in AFC curve is greater than the rise in AVC curve. But as the output continues to increase, the AVC curve starts to rise steeply at a rate higher than the rate at which the AFC curve falls. At this point the ATC curve starts to rise, which gives rise to the "U" shaped ATC curve

I hope this will help you