Derivation of short-run average cost curves

1. Average fixed cost (AFC)

      The average fixed cost is obtained by dividing the total fixed cost by the level of outputs. It is also known as the per unit fixed cost of output.

Symbolically;
AFC = TFC / Q

It can be explained by the help of following schedule and diagram:

Output (in units)	TFC (Rs)	AFC (Rs)
1	30	30
2	30	15
3	30	10
4	30	7.5
5	30	6

2. Average variable cost (AVC)

      Average variable cost is obtained by dividing the total variable cost by the corresponding levels of output. It can be expressed as:

AVC = TVC / Q

   We can derive AVC by the help of following schedule and diagram:

Output (in units)	TVC (Rs)	AVC (Rs)
1	20	20
2	30	15
3	45	15
4	80	20
5	145	29

In the above figure, we can see that AVC falls at the beginning and then inclines. An AVC curve is 'U' shaped because of the operation of the law of variable proportion.

3. Average Total Cost (ATC/ AC)

        Average total cost is obtained by dividing the total cost by the corresponding level of output. It can be expressed as;

ATC = TC / Q = ( TFC + TVC ) / Q = AFC + AVC

It can be derived with the help of following schedule and diagram:

Output (in units)	AFC (Rs)	AVC (Rs)	ATC (Rs)
1	30	20	50
2	15	15	30
3	10	15	25
4	7.5	20	27.5
5	6	29	35

In the above diagram, we can see that ATC falls at the beginning. It becomes minimum and rises after that point. Therefore, it is 'U' shaped.