AVERAGE FIXED COST Meaning and
Definition
-
Average fixed cost is a concept used in economics to measure the fixed expenses associated with producing a product or providing a service. It is calculated by dividing the total fixed costs by the quantity of units produced.
Fixed costs are expenses that do not vary with the level of production, such as rent, insurance premiums, and depreciation. These costs are incurred regardless of the number of units produced. Examples of fixed costs include the cost of factory space, machinery, and equipment.
By dividing the total fixed costs by the number of units produced, the average fixed cost provides insight into the fixed cost per unit. It allows economists and businesses to determine the impact of fixed costs on each unit of output.
Average fixed cost exhibits a relationship with the level of production. As the quantity of units produced increases, the average fixed cost per unit decreases, due to the spreading out of fixed costs over a larger number of units. Conversely, if the number of units produced decreases, the average fixed cost per unit will increase.
Understanding average fixed cost is crucial for businesses as it helps in determining the breakeven point, which is the level of production at which the total revenue equals total costs. Additionally, it assists in making pricing decisions and assessing the overall efficiency of a firm's operations.
