Explain, using a diagram, the shapes of average fixed and average variable cost curves.

AVC Explanation:

Variable costs change with output. Therefore, as output increases, the Average Variable Cost (AVC) falls due to increasing returns. This occurs because, initially, resources are used more efficiently, lowering the cost per unit of output. However, after reaching an optimum point, diminishing or decreasing returns set in, causing the AVC curve to rise. This happens because the fixed factors become overworked and the productivity of additional labour declines, leading to higher costs per unit of output.

AFC Explanation:

Fixed costs do not change with output. As output increases, the fixed cost is divided by an increasing quantity of output. Consequently, the Average Fixed Cost (AFC) falls rapidly at first but can never quite reach the x-axis. This is because, while the fixed cost per unit decreases as production increases, it will always remain positive, and thus, AFC will never actually touch the x-axis.