Key Diagrams - Average Fixed Cost Curve (AFC)

In this video we work through the shape of the average fixed cost curve for a business in the short run.

As short run production increases, total fixed costs remains the same. Therefore, average fixed cost (TFC/Q) must fall.

This is an important cost concept for start-up and challenger businesses in markets. If they can ramp up sales and output fairly quickly, then they can bring down AFC and hopefully lower their average total costs to make them more cost and price competitive.

Many businesses these days try to operate with lean production systems, keeping their fixed costs as low as possible. For example, hiring out machinery rather than buying it, or employing workers on flexible short-term contracts rather than adding them to the longer-term contracted payroll.