Average Total Cost

Average Total Cost or Average Cost:

Average total cost is simply termed as average cost that is the net cost divided by the number of units of output generated.

AC = TC / Q

Here,

AC = Average Cost
TC = Total Cost
Q = number of units of output generated

Average cost is the summation of average fixed cost and average variable cost. That is,

AC = AFC+AVC

Table: Calculation of Average Fixed, Average variable and Average Total Cost

1039_average total cost1.jpg

The average cost is also termed as the unit cost as it is the cost per unit of output produced. The following figure exhibits the shape of AFC, AVC & ATC in short period.

40_average total cost2.jpg

 Figure: Short run average cost curves

From the figure above, it can be understood that the behavior of the average total cost curve based on the behavior of AFC and AVC curves. In beginning, both AFC and AVC drop. Therefore ATC curve drops.

Whenever AVC curve starts rising, AFC curve falls steeply that is, fall in AFC is greater than the rise in AVC. Therefore ATC curve continues to drop. However as output rises further, there is a sharp rise in AVC that is greater than the fall in AFC. Therefore ATC curve mounts after a point. The ATC curve similar to AVC curve falls first, reaches the minimum value and then increases. Therefore it has taken a U shape.

 

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