Short Run Cost Curves:

Average Cost Curve:

The Short Run Average Cost (SRAC) is refer to as the cost per unit of output.

To compute SRAC the total cost (TC) is divided by the number of units produced.

SRAC = TC / Q

Corresponding to three types of total costs in the short — run, there are three types of average cost namely:

1. Average Fixed Cost (AFC)

2. Average Variable Cost (AVC)

3. Average Total Cost (ATC).

1. Average Fixed Cost (AFC) :

• Average fixed cost is the per unit cost of the fixed factors.
• It is obtained by dividing total fixed cost (TFC) by total unit of output produced.

AFC = TFC / Q

• Average fixed cost falls throughout with an increase in output because the total fixed cost is constant while the units of output increases.

Average Fixed Cost Curve (AFC curve):

• AFC curve is a ‘Rectangular Hyperbola’ showing the same level of total fixed costs at all the level of output.
• AFC declines as output increases, as fixed cost remains constant.
• AFC curve is a downward sloping throughout its length, from left to right showing continuous fall in average fixed cost with an increase in output.
• AFC curve never touching X and Y axis from any of its end because average fixed cost can not be zero since the total fixed cost is positive.

2. Average Variable Cost (AVC) :

• Average variable cost is the per unit cost of the variable factors of production.
• It is obtained by dividing the total variable cost with the units of output. Means,

AVC = TVC / Q

Average Variable Cost Curve (AVC) :

• AVC curve is a ‘U’ shaped curve.
• The downward sloping of AVC curve shows the decrease in average variable cost with OQ level of output.
• Its minimum point ‘A’ corresponds to the optimum capacity level of output OQ.
• Afterward, its upward slope indicate an increase in average variable cost.
• AVC curve is ‘U’ shaped because it follows directly from the law of variable proportions.
• AVC curve slopes negatively (downward) due to the increasing returns to the variable factor, up to the optimum capacity level (minimum point ‘A’). This is because of better utilisation of fixed factor and specialisation and division of labour.

The AVC curve slopes positively from its minimum point due to the decreasing returns to the variable factor, because of over utilisation and overcrowding and difficulty in management.

3. Average Cost (AC) or Average Total Cost (ATC) Curve:

• Average Total Cost is the per unit cost of both fixed and variable factors of production.
• It is obtained by dividing Total Cost (TC) by total units of output.

AC or ATC = TC/ Q

Since, TC = TFC + TVC

Therefore, AC = (TFC + TVC) / Q

AC = ( TFC/Q) + ( TVC / Q)

AC = AFC + AVC

Average Total Cost Curve (ATC or AC):

• ATC or AC curve is the vertical summation of AFC and AVC curves.
• Since, ATC — AVC = AFC

The difference between Average Total Cost curve and Average Variable Cost curve is Average Fixed Cost curve. This, ATC curve lies above AVC curve equal to the value of AFC curve.

• At initial level of output ATC curve is far above the AVC curve because AFC is a high percentage of the average total cost.

But at higher level of output AC curve come closer to AVC curve as average fixed cost accounts for a small percentage of average total cost.

• ATC curve is ‘U’ shaped indicating that average total cost falls initially and reaches to minimum point and then starts rising. The level of output at which the ATC curve is minimum is known as optimum point of production.
• ATC curve is ‘U’ shaped because it follows directly the Law of Variable Proportions.