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In this article, Patrick Cowie of Berkhamsted Collegiate School, examines one of the fundamental assumptions about the shape of the average cost curve.
Summary of Key Points
* Fixed costs are 'overhead costs' and do not vary with output.
* Variable costs are 'direct costs' and do vary with output.
* In the example of a budget airline, most costs are fixed, including labour.
* This gives rise to an L-shaped average cost curve.
* The L-shaped average cost curve may apply in many industries, although we can still apply the U-shaped average cost curve to agriculture.
PDF format: 3 A4 pages. First published in Economics Today magazine November 2002.
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