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rogerarnold
rogerarnold
Student
College - Sophomore

THE AVERAGE VARIABLE COST CURVE AND THE AVERAGE TOTAL COST GET CLOSER TO EACH AS OUTPUT INCREASES.WHAT EXPLAINS THIS?

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Posted by rogerarnold on Wednesday November 11, 2009 at 5:53 PM and tagged with business, cost, economics.

Answers:


  1. pohnpei397 Teacher
    Community / Jr. College

    eNotes Editor

    Best answer as selected by question asker.

    To start with, you must remember that the average total cost is made up of the average variable cost and the average fixed cost.  Variable costs are those that vary with the amount produced (for example, the cotton that goes into t-shirts) while fixed costs remain the same no matter how many are produced (for example, the sewing machines or the building in which they are produced).

    When you are only producing a few t-shirts, for example, the fixed costs make up most of the average total cost.  You've paid a lot for the machines and the building, but you're only making a few shirts so you don't have to pay much for the cotton.

    But now you start working at 100% capacity.  You're buying lots of cotton and paying your workers lots of money.  But the fixed costs have remained the same.  Because of that, the variable costs are coming to be a much greater part of your total costs.

    So -- this happens because as you make more of a product your fixed costs become lower in comparison to your variable costs.

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    Posted by pohnpei397 on Wednesday November 11, 2009 at 6:03 PM

  2. krishna-agrawala
    krishna-agrawala Teacher
    Graduate School

    eNotes Editor

    Average variable cost (AVC) and average total cost (ATC) curves get closer to each other as the total output (Q) increases only when the cost follows a definite pattern as the Q is varied.

    Typically the total cost of production can be divided in two components, fixed cost (FC) and variable cost (VC). The FC remains same irrespective of the output, while VC varies directly in proportion to the output. For cost of this type the average variable cost and average total cost are given by following equations.

    AVC = (QxVC)/Q = VC

    ATC = [FC + (QxVC)]/Q = FC/Q + V

    As can be seen from other the difference between AVC and ATC is equal to FC/Q, which becomes smaller as Q (output) increases . This means AVC comes closer to ATC as output increases. In other words Average variable cost curve and average total cost curve get closer to each other as the total output increases.

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    Posted by krishna-agrawala on Thursday November 12, 2009 at 5:34 AM