As a firm’s output rises in the short run, the vertical gap between i…

As a firm’s output rises in the short run, the vertical gap between its SAC curve and its AVC curve becomes smaller. Which chain of reasons is correct?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → TFC stays constant → AFC = TFC/q falls as q rises → the gap between SAC and AVC, which equals AFC, narrows

Since SAC = AVC + AFC, the vertical gap between SAC and AVC is AFC. TFC is constant, so AFC = TFC/q keeps falling as q rises, and the gap narrows.

Option (1) TFC stays constant → AFC = TFC/q falls as q rises → the gap between SAC and AVC, which equals AFC, narrows — Correct. Each link holds.

Option (2) SMC rises after a point → SMC cuts SAC from below at its minimum → the gap between SAC and AVC narrows — Incorrect. Where SMC cuts SAC tells where SAC is lowest. It does not decide the gap, which is AFC.

Option (3) TFC rises with output → AFC rises → the gap between SAC and AVC narrows — Incorrect. TFC does not change with output, and a rising AFC would widen the gap.

Option (4) TVC rises with output → AVC falls at every output → so the SAC curve comes closer to the AVC curve — Incorrect. AVC does not fall at every output; it is ‘U’-shaped. The gap depends on AFC, not AVC.

NCERT (2026-27): “Shapes of the Short Run Cost Curves … AFC is the ratio of TFC to q. TFC is a constant. Therefore, as q increases, AFC decreases. When output is very close to zero, AFC is arbitrarily large, and as output moves towards infinity, AFC moves towards zero. AFC curve is, in fact, a rectangular hyperbola. If we multiply any value q of output with its corresponding AFC, we always get a constant, namely TFC.”

“Shapes of the Short Run Cost Curves … Let us now look at SAC. SAC is the sum of AVC and AFC. Initially, both AVC and AFC decrease as output increases. Therefore, SAC initially falls. After a certain level of output production, AVC starts rising, but AFC continuous to fall. Initially the fall in AFC is greater than the rise in AVC and SAC is still falling. But, after a certain level of production, rise in AVC becomes larger than the fall in AFC. From this point onwards, SAC is rising. SAC curve is therefore ‘U’-shaped. It lies above the AVC curve with the vertical difference being equal to the value of AFC. The minimum point of SAC curve lies to the right of the minimum point of AVC curve.”