AFC Formula
Average Fixed Cost (AFC) = Total Fixed Costs (FC) ÷ Quantity Produced (Q)
Where:
- Total Fixed Costs (FC) are the total costs that are only fixed. Examples are rent, machinery, and administrative salaries.
- Quantity Produced (Q) is the number of units produced.
Formula Explanation
To find the average fixed cost, you divide the total fixed costs (like rent and salaries) by the number of items you make. This tells you how much of those fixed costs each item shares.
How to Calculate Average Fixed Cost – Step by Step
Step 1 – Find the Total Fixed Costs (TFC) – These are the costs that don’t change no matter how much you make, like rent or a manager’s salary.
Step 2 – Find how many items you made (Q). This could be cups of lemonade, toys, or any product.
Step 3 – Apply the formula or use the calculator. Divide the total fixed costs by the number of items you made to get the average fixed cost.
Example
A coffee shop makes 20,000 cups of coffee in one month. The fixed costs for that month are:
- Rent: $5,000
- Administrative salaries: $4,000
- Equipment Cost: $3,000
- Step 1: Add these up: $5,000 + $4,000 + $3,000 = $12,000
- Step 2: They made 20,000 cups of coffee.
- Step 3: Divide the fixed cost by the number of cups: $12,000 ÷ 20,000 = $0.60.
Result: The average fixed cost is $0.60 per cup, meaning it costs $0.60 in fixed expenses to make each cup.
What is Average Fixed Cost (AFC)? Full Definition
Average fixed cost is how much, on average, it costs to cover things like rent and salaries for each item you make. These are costs that don’t change even if you make more or less. The more items you make, the lower the average fixed cost per item.
Average Variable Cost vs. Average Fixed Cost
Fixed costs stay the same no matter how much you make (like rent).
Variable costs change with how much you make (like ingredients).
Average fixed cost gets smaller as you make more because the fixed cost spreads out. Average variable cost can change but is based on things that go up or down with how many items you make.
Average Cost and Total Cost vs. Average Fixed Cost
Average fixed cost (AFC) is the fixed cost per item made.
Average cost (AC) includes both fixed and variable costs and shows the total cost per item.
Total cost (TC) is everything you spend (fixed and variable costs).
Marginal Cost vs. Average Fixed Cost
Marginal cost (MC) is the extra cost to make one more item.
Average fixed cost (AFC) is spreading out the cost of things that don’t change, like rent, over all the items you make.
Average Fixed Cost Tables
Assuming fixed costs of $100,000
| Units Produced | Average Fixed Cost |
| 1 | $100,000 |
| 10 | $10,000 |
| 100 | $1,000 |
| 1,000 | $100 |
| 5,000 | $20 |
| 10,000 | $10 |
| 50,000 | $2 |
| 100,000 | $1 |
| 500,000 | $0.20 |
| 1,000,000 | $0.10 |
Assuming fixed costs of $500,000
| Units Produced | Average Fixed Cost |
| 1 | $500,000 |
| 10 | $50,000 |
| 100 | $5,000 |
| 1,000 | $500 |
| 5,000 | $100 |
| 10,000 | $50 |
| 50,000 | $10 |
| 100,000 | $5 |
| 500,000 | $1 |
| 1,000,000 | $0.50 |
FAQs
Q: What happens to average fixed cost as production increases?
A: As production increases, average fixed cost decreases because fixed costs are spread across more units, reducing the per-unit cost of these expenses.
Q: Why does average fixed cost never reach zero or be a negative number?
A: If fixed costs were entirely eliminated, or made so small that they were less than $0.01/unit, then theoretically they could reach zero. AFC could not be a negative number.
In most practical situations, fixed costs are always there. AFC declines as production rises, but it remains above zero since fixed costs do not disappear.
Q: Does average fixed cost ever increase?
A: Yes. If production drops, the average fixed cost will increase.
Q: What happens to average fixed cost when output falls?
A: Average fixed cost rises. Fewer units share the fixed costs, increasing the fixed cost per unit.
Q: Is labour and salaries a fixed or variable cost?
A: It can be either.
It is a fixed cost if it does not change depending on the amount of production. An example would be administrative and office salaries.
It is variable if it changes depending on the volume of production. An example would be hourly wages.
Q: Are variable costs such as materials and hourly wages included in an average fixed cost calculation?
A: No. Costs that are used depending on the number of units produced are not included in an average fixed calculation.
Sources and more resources
- Wikipedia contributors. (2023, November 1). Average fixed cost. Wikipedia. https://en.wikipedia.org/wiki/Average_fixed_cost
- Kacapyr, E., & Redelsheimer, J., & Musgrave, F. Barron’s AP Microeconomics / Macroeconomics (6th ed.). (2018). United States of America: Barron’s. ISBN: 978-1-4380-1065-6. Page 94.
- Pindyck, R., & Rubinfeld, D., Microeconomics (8th ed.), (2013). United States of America: Pearson. ISBN 13: 978-0-13-285712-3. Page 237.
- Greenlaw, S., & Shapiro, D., Principles of Microeconomics 2e. (2018). Houston: Rice University OpenStax. ISBN 13: 978-1-947172-35-7. Page 169.
- Khan Academy. (n.d.). https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/production-cost-and-the-perfect-competition-model-temporary/short-run-production-costs/v/fixed-variable-and-marginal-cost
- ReviewEcon.com. (2023, September 19). What do I need to know about cost curves? – ReviewEcon.com. https://www.reviewecon.com/what-do-i-need-to-know-about-cost-curves
- Jacob Clifford. (2014, October 3). Short-Run Cost Curves (Part 2)- Micro Topic 3.2 [Video]. YouTube. https://www.youtube.com/watch?v=qYKJdooEnwU