In the above example the divisibility of the fixed factor results in the proportion of
fixed to variable factors remaining constant over a range from 50 to 500 calls. AVC and
MC are therefore constant over that range of output.
Despite the simplicity of our mail order example, it nevertheless illustrates the possibility
of fixed factor divisibility. In essence the firm plans to provide itself with a degree
of reserve capacity to enhance flexible production. Such a situation is illustrated in
Figure 5.7 where between Q1 and Q2 then AVC = MC. Over this range of output the firm
is considered to have planned reserve capacity. Although the firm anticipates producing
between Q1 and Q2, firms usually consider their normal capacity utilisation (or load
factor) to be approximately two-thirds from Q1 to Q2 at output X in Figure 5.7.
The above reserve capacity is different in nature from that first referred to in Figure 5.6.
In traditional theory, with inflexible fixed factors, the plant is designed to produce optimally
at a single level of output and producing with excess capacity results in higher
variable costs per unit produced.
Although divisibility of fixed factors can result in a horizontal section of the AVC
curve, ATC continues to decline over this output range due to decreasing AFC. In other
words, although certain units of the fixed factor may not be used when the firm produces
at normal capacity utilisation, they nevertheless represent a cost to the firm. ATC
still equals AFC + AVC, as illustrated in Figure 5.8. Note that MC intersects ATC at its
lowest point, at an output to the right of Q2.