Originally posted by charlize:
Total cost is made up of Total Fixed Cost and Total Variable Cost.
Dividing the above with n units will give you the average total cost (ATC), average fixed cost (AFC) and average variable cost (AVC).
Check the standard graph for the above. It is in all econs 101 textbook.
The average variable cost increases with the more units produced. (assuming technology constant, ceteris paribus etc etc)
AVC increases, ATC increases.
Juz to add on a little from here, trying to recall from the econs texts tt I threw away years ago...
AVC (and therefore ATC / AC) does not fall indefinitely... When economies of scale runs out, cost can actually move upwards with increased quantity... tt explains why it is graphically a U-shaped curve, rather than a downward-sloping curve...
Always keep in mind that profit-maximisation (not cost-minimisation per se) is key, hence the level to produce would ideally be at where MC=MR (and not always at point of lowest AC)... The only exceptions would probably be for non-profit/govt firms tt are only concern with cost... Eg provision of electricity...
Hope this helps...
