Final answer:
Unit fixed costs, or overhead, remain constant regardless of production levels. The average fixed cost curve slopes downward as fixed costs are spread over an increasing number of units. However, focusing solely on these can be misleading and ignore the importance of variable costs and total cost considerations.
Step-by-step explanation:
The behavior of unit fixed costs, also known as overhead, is such that they do not vary with the level of production or sales. Instead, they are constant for a specified period. When we take the fixed cost, for example, $1,000, and divide it by the number of units produced, we get the average fixed cost.
The average fixed cost curve is typically a downward-sloping curve when plotted on a graph because as production volume increases, the fixed cost is spread out over more units. This is what is referred to as spreading the overhead. Producing more units lowers the average fixed cost per unit because the same total amount of fixed costs is divided by a greater number of units.
In the long-run, fixed costs can change and become variable or there might be no fixed costs at all. Fixed costs are often sunk costs since they cannot be recovered once they are spent. Understanding this concept is crucial for a firm as it indicates that sunk costs should generally be disregarded for future economic decisions. Instead, firms should focus on variable costs which can still be adjusted.
A dangerous aspect of focusing on average fixed costs is that it might lead businesses to overlook the relevance of total costs, which include both fixed and variable costs. This can lead to incorrect pricing or production decisions. Furthermore, during the production process, businesses may encounter the phenomenon of diminishing marginal returns, where adding an additional factor of production leads to a smaller increase in output, eventually increasing the total cost of production per additional unit.