The Average Fixed Cost, or AFC curve, is the graphical representation of the average fixed cost. It starts at the first unit of output. As the level of output increases, the same fixed cost is allocated across more units, leading to a decrease in the AFC. This relationship results in a downward-sloping AFC curve across all potential levels of output. The curve approaches zero but never actually reaches it.
The Average Variable Cost (AVC) curve begins when the output is one unit. At low levels of output, the firm benefits from increasing returns. However, as output grows, the firm eventually experiences diminishing returns. This pattern of increasing and then diminishing returns results in the U-shaped AVC curve.
The ATC curve represents the average total cost of production. Since average total cost combines both average variable cost and average fixed cost, and the AFC curve declines consistently, the gap between the ATC and AVC curves decreases as output increases.
