Why is average total cost curve above average variable cost curve?

Answer 1

The Average Total Cost (ATC) curve is above the Average Variable Cost (AVC) curve because the ATC is composed of the AVC and the AFC (average fixed cost curve). The AVC curve starts out low at low levels of output, and eventually, as more of the variable unit is added, AVC begins to slop upward. Conversely, AFC starts out higher, but as more units are produced, the fixed costs are spread out over more units so the AFC curve is actually a downward sloping straight line. When you add the AVC and AFC at each level of production and graph the result, you are given the ATC line which is a U-shaped curve above the AFC & AVC. An example of VC would be labor. In the short-run where plant size is fixed, in order to produce more units, you would have to hire more labor. As you add workers, you will initially see a productivity gain, but as more and more workers are added, their marginal output will fall. FC is simple. Suppose you have a factory that costs you $100/year to operate. If you produce only 1 unit that year, your fixed costs are spread out over the single unit, so $100 AFC. Now suppose you up production to 3 units and AFC falls to $33.34/unit. Go even further and produce 25 units and now AFC is $4/unit. Graph this line. The sum of these 2 curves, AVC & AFC, equals ATC.