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Discuss why it is important for a firm’s success that average variable costs (AVC) decrease for...

Discuss why it is important for a firm’s success that average variable costs (AVC) decrease for low levels of output. To help, select a specific product and discuss the inputs to production and why it makes sense that this product has decreasing AVC for low levels of output. Now, explain why average fixed costs (AFC) are always decreasing? Does the type of market matter for observing decreasing AFC, why or why not?

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Answer #1

For a firm to enjoy the economy of scale its AVC must decrease with increase in output upto certain optimum quantity. Since the marginal cost of labor and capital increases upto a certain level, for low levels of output its AVC should decrease.

Also AFC is always decreasing. For example there is a Bakery furnace which is fixed cost. It can produce 2000 biscuits per day. And we are producing only 1500. So even if we start producing 1700, we don't require another bakery furnace so the AFC will decrease.

Different type of market have different AFC observations, for example the service industry and manufacturing industry.

In service industry AFC is less steeper than in manufacturing industry.

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