In other words, the increase in AVC more than offsets the fall in AFC. This means that increase in output beyond OQ 2will lead to an increase in AVC. If a firm produces less than the minimum point of the AC curve then it experiences ‘excess capacity’, and, if a firm produces beyond the minimum point of the AC curve, it experiences the ‘above capacity’. As fixed costs do not change, one can say that Q 1A = Q 2B = Q 3C. Similarly, for output OQ 2, AFC = Q 2B/OQ 2and for output OQ 2, AFC = Q 3C/OQ 3. Corresponding to this output level, AFC is the slope of the ray OA, i.e., AFC = Q 1A/OQ 1. We have chosen points A, B and C on the TFC curve and on all these points we have drawn rays OA, OB and OC.Ĭonsider output OQ 1. Since AFC = TFC/Q, AFC is given by the slope of a ray from the origin to a point on the TFC curve. Here the output OQ 1, OQ 2 and OQ 3 have been measured in such a way that OQ 1 = Q 1Q 2 = Q 2Q 3. 3.13(a), we have drawn TFC curve parallel to the output axis. 3.13 illustrates the derivation of AFC curve from the TFC curve. This means that it touches neither the horizontal axis nor the vertical axis.įig. The AFC curve is asymptotic to both the axes. Further, the AFC curve is a rectangular hyperbola in the sense that all rectangles formed by AFC are of equal sizes. ![]() As the same volume of fixed cost is divided by the – larger volume of output, AFC must decline. As output increases and TFC remains fixed, AFC declines continuously.
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