Since a greater amount of variable input would be necessary as the output increases, we have higher average variable costs for higher levels of produced outputs. This effect is called the diminishing returns effect. This effect is also known as diminishing returns to the variable input Each unit of output that the firm produced additionally adds more to the variable cost since a rising amount of variable input would be necessary to produce the additional unit.
On the other hand, we see a rising average variable cost.
The Average Variable Cost and the Diminishing Returns Effect Given a certain amount of fixed cost, the average fixed cost decreases as the output increases. This effect is called the spreading effect since the fixed cost is spread over the produced quantity. This is the reason why we have a falling average fixed cost curve in Figure 1 above. Since the total fixed cost is fixed, the more you produce, the average fixed cost per unit will decrease further. In other words, fixed costs equal the required investment you need to make to start producing. This includes, for instance, necessary machines, stands, and tables. You can think of the fixed cost as the amount of money you need to open a bakery. Price Determination in a Competitive Market.Market Equilibrium Consumer and Producer Surplus.Determinants of Price Elasticity of Demand.Effects of Taxes and Subsidies on Market Structures.Monopolistic Competition in the Short Run.Monopolistic Competition in the Long Run.Behavioural Economics and Public Policy.
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