Class 11 Micro Economics Notes · CBSE

Average Costs (AFC, AVC, AC)

Average Costs — understanding per-unit costs: AFC, AVC and AC, with their curves and phases. CBSE Class 11 Microeconomics notes with formulas and calculators.

Last updated: 12 Sep 2026

Notes

Per Unit Costs Overview

In addition to total costs (TFC, TVC, TC), firms also analyse costs per unit of output. There are three important per-unit cost measures: Average Fixed Cost (AFC), Average Variable Cost (AVC), and Average Cost (AC). These are derived by dividing total costs by output.

Average Fixed Cost (AFC)

AFC is the fixed cost per unit of output. It is obtained by dividing TFC by the quantity of output (Q). AFC continuously declines as output increases because the same TFC is spread over more and more units.

Average Fixed Cost

AFC = \frac{TFC}{Q}

Table 6.4: AFC falls continuously as output increases — the same TFC is spread over more units.
Output (in units)	TFC (₹)	AFC (₹) = TFC ÷ Output
0	12	∞ (12 ÷ 0)
1	12	12
2	12	6
3	12	4
4	12	3
5	12	2.40

Fig 6.4: AFC curve is a rectangular hyperbola — it approaches both axes but never touches them.

AFC curve is a rectangular hyperbola — it approaches both axes but never touches them. As output increases, AFC gets closer and closer to zero but never reaches it.

AFC never touches either axis. It cannot be zero because TFC is always positive. It cannot be infinite because at very high output, AFC becomes negligibly small.

AFC Calculator

AFC = \frac{TFC}{Q}

Total Fixed Cost (TFC)

Output (Q)

AFC

₹ 3

Average Variable Cost (AVC)

AVC is the variable cost per unit of output. It is obtained by dividing TVC by the quantity of output (Q). AVC initially falls, reaches a minimum, and then rises — giving it a U-shape.

Average Variable Cost

AVC = \frac{TVC}{Q}

Table 6.5: AVC falls initially, reaches minimum, then rises — U-shaped curve.
Output (in units)	TVC (₹)	AVC (₹) = TVC ÷ Output
0	0	—
1	6	6
2	10	5
3	15	5
4	24	6
5	35	7

Fig 6.5: AVC curve is U-shaped — it falls initially, reaches minimum, then rises.

AVC curve is U-shaped due to the Law of Variable Proportions. Initially, increasing returns to the variable factor cause AVC to fall. Beyond a point, diminishing returns set in and AVC starts rising.

Think of a chai stall: when you make 10 cups, the cost per cup is high (you're inefficient). As you make 50 cups, you become more efficient and cost per cup falls. But beyond 200 cups, you need extra helpers, more utensils — cost per cup starts rising again.

AVC Calculator

AVC = \frac{TVC}{Q}

Total Variable Cost (TVC)

Output (Q)

AVC

₹ 5

Average Cost (AC)

AC is the total cost per unit of output. It can be calculated in two ways: (1) by dividing TC by Q, or (2) by adding AFC and AVC. AC is also U-shaped due to the combined behaviour of AFC and AVC.

Average Cost

AC = \frac{TC}{Q}

Average Cost (Alternative)

AC = AFC + AVC

Table 6.6: AC is the sum of AFC and AVC at each output level.
Output (in units)	AFC (₹)	AVC (₹)	AC (₹) = AFC + AVC
0	∞	—	∞
1	12	6	18
2	6	5	11
3	4	5	9
4	3	6	9
5	2.4	7	9.4

Fig 6.6: AC curve is U-shaped. Points A (end of Phase 1) and B (minimum of AC) mark the three phases.

Phase 1: Falling AC

AC falls because AFC is falling rapidly and AVC is also falling (or rising slowly). The decline in AFC more than offsets any rise in AVC.

Phase 2: Minimum AC

AC reaches its minimum. The fall in AFC is exactly offset by the rise in AVC. This is the most efficient level of production.

Phase 3: Rising AC

AC rises because AVC is now rising sharply (due to diminishing returns) and the fall in AFC is no longer enough to compensate.

AC Calculator

AC = AFC + AVC

AFC (₹)

AVC (₹)

₹ 9

AC, AVC and AFC Observations

Fig 6.7: AC, AVC and AFC together. AC is always above AVC; the gap equals AFC and narrows as output rises.

AC is always above AVC because AC = AFC + AVC. Since AFC is always positive, AC must be greater than AVC at every output level.

AVC reaches its minimum before AC reaches its minimum. AVC stops falling and starts rising earlier because it does not include the continuously declining AFC.

The vertical gap between AC and AVC equals AFC. This gap decreases as output increases (because AFC falls) but the two curves never intersect — they get closer but always remain apart.

Key Takeaways

AFC = TFC/Q — it falls continuously as output increases (rectangular hyperbola shape).
AVC = TVC/Q — it is U-shaped due to the Law of Variable Proportions.
AC = TC/Q = AFC + AVC — it is also U-shaped.
AC is always above AVC; the gap between them equals AFC and narrows as output rises.
AVC reaches its minimum before AC does.
The three per-unit costs help firms decide the optimal level of output.