IGCSE Economics 0455: AFC, AVC and AC at Two Output Levels

Foxglove Ceramics is a small pottery studio that makes handmade mugs. Its fixed costs (kiln lease and studio rent) are $2000 per month, whatever the number of mugs it makes. Each mug uses $3 of clay, glaze and firing costs (its variable cost per mug), and this amount per mug does not change with the number of mugs made.

(a) The studio makes 250 mugs in one month. Calculate its average fixed cost (AFC), average variable cost (AVC) and average cost (AC) per mug. [3]

(b) In a busier month, the studio makes 500 mugs instead. Calculate its average fixed cost (AFC), average variable cost (AVC) and average cost (AC) per mug for this month. [3]

(c) Using your figures from (a) and (b), explain why average cost (AC) is lower when the studio makes 500 mugs than when it makes 250 mugs. [2]

Part (a): Costs per mug at an output of 250 mugs

Total variable cost at 250 mugs:

$\text{Total variable cost} = 3 \times 250 = 750$

Total cost at 250 mugs:

$\text{Total cost} = \text{Fixed cost} + \text{Variable cost} = 2000 + 750 = 2750$

Now the three averages:

$AFC = \frac{2000}{250} = 8 \qquad AVC = \frac{750}{250} = 3 \qquad AC = \frac{2750}{250} = 11$

So at 250 mugs: AFC = $8, AVC = $3, AC = $11 per mug. (Check: $AFC + AVC = 8 + 3 = 11 = AC$ . ✓)

Part (b): Costs per mug at an output of 500 mugs

Total variable cost at 500 mugs:

$\text{Total variable cost} = 3 \times 500 = 1500$

Total cost at 500 mugs:

$\text{Total cost} = \text{Fixed cost} + \text{Variable cost} = 2000 + 1500 = 3500$

Now the three averages:

$AFC = \frac{2000}{500} = 4 \qquad AVC = \frac{1500}{500} = 3 \qquad AC = \frac{3500}{500} = 7$

So at 500 mugs: AFC = $4, AVC = $3, AC = $7 per mug. (Check: $AFC + AVC = 4 + 3 = 7 = AC$ . ✓)

Part (c): Why average cost is lower at 500 mugs

Comparing the two months:

Output	AFC	AVC	AC
250 mugs	$8	$3	$11
500 mugs	$4	$3	$7

Average variable cost (AVC) is unchanged at $3 per mug in both months, because each mug always uses the same $3 of clay, glaze and firing regardless of how many mugs are made. Average fixed cost (AFC), however, halves from $8 to $4, because the same $2000 of fixed cost (kiln lease and studio rent) is now spread over twice as many mugs. Since $AC = AFC + AVC$ and only AFC has changed, the entire $4 fall in average cost (from $11 to $7) is explained by the fall in average fixed cost as output rises.

Final answers

(a) At 250 mugs: AFC $=$ $8, AVC $=$ $3, AC $=$ $11.
(b) At 500 mugs: AFC $=$ $4, AVC $=$ $3, AC $=$ $7.
(c) AC falls because AFC falls (fixed cost spread over more mugs) while AVC stays constant at $3 per mug.