average total cost

(noun)

Average cost or unit cost is equal to total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).

Related Terms

Examples of average total cost in the following topics:

  • Production Outputs

    • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
    • The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
    • Normal Profit: The average total cost equals the price at the profit-maximizing output.
    • Loss-minimizing condition: The firm's product price is between the average total cost and the average variable cost.
    • It is not produced based on average total cost (ATC).

  • Average and Marginal Cost

    • Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
    • In economics, marginal cost is the change in the total cost when the quantity produced changes by one unit.
    • The total cost for making two pairs of shoes is $40.
    • The average cost is the total cost divided by the number of goods produced.
    • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.

  • The Law of Diminishing Returns

    • The average total cost of production is the total cost of producing all output divided by the number of units produced.
    • Average total cost is interpreted as the the cost of a typical unit of production.
    • Average total cost can also be graphed with quantity of output on the x axis and average cost on the y-axis.
    • What will this average total cost curve look like?
    • As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing.

  • Costs and Production in the Short-Run

    • FC is total fixed cost and may be referred to as TFC.
    • Sometimes VC is called total variable cost (TVC).
    • Average Variable Cost (AVC) is the VC divided by the output, AVC = VC/Q.
    • Total Cost (TC) is the sum of the FC and VC.
    • Average Total Cost (AC or ATC) is the total cost per unit of output.

  • Natural Monopolies

    • The total cost of the natural monopoly is lower than the sum of the total costs of two firms producing the same quantity .
    • Along with this, the average cost of production decreases and then increases.
    • In contrast, a natural monopoly will have a marginal cost that is constant or declining, and an average total cost that drops as the quantity of output increases.
    • Therefore, in industries with large initial investment requirements, average total costs decline as output increases.
    • The total cost of the natural monopoly's production is lower than the sum of the total costs of two firms producing the same quantity.

  • Economic Costs

    • Total cost (TC): total cost equals total fixed cost plus total variable costs (TC = TFC + TVC) .
    • Average cost (AC): total costs divided by output (AC = TFC/q + TVC/q).
    • Average fixed cost (AFC): the fixed costs divided by output (AFC = TFC/q).
    • Average variable cost (AVC): variable costs divided by output (AVC = TVC/q).
    • The average variable cost curve is normally U-shaped.

  • Average Cost Method

    • Under the Average Cost Method, It is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.
    • Note that we compute weighted average cost per unit by dividing the cost of units available for sale, $690, by the total number of units available for sale, 80.
    • The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale.
    • There are two commonly used average cost methods: Simple Weighted Average Cost method and Moving-Average Cost method.
    • Under periodic inventory procedure, a company determines the average cost at the end of the accounting period by dividing the total units purchased plus those in beginning inventory into total cost of goods available for sale.

  • The Supply Curve in Perfect Competition

    • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
    • In economics, a cost curve is a graph that shows the costs of production as a function of total quantity produced.
    • The various types of cost curves include total, average, marginal curves.
    • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
    • The total revenue-total cost perspective recognizes that profit is equal to the total revenue (TR) minus the total cost (TC).

  • Inventory Techniques

    • FIFO, LIFO, and average cost methods are accounting techniques used in managing inventory.
    • Average cost method is quite straightforward.
    • There are two commonly used average cost methods: Simple weighted average cost method and moving average cost method.
    • It takes Cost of Goods Available for Sale and divides it by the total amount of goods from Beginning Inventory and Purchases.
    • This gives a Weighted Average Cost per Unit.

  • Cost-Based Pricing

    • Price = (1+ Percent Markup)(Unit Variable Cost + Average FixedCost) .
    • The bicycle divi­sion, which management thought of as Diamond's core business, gen­erated just 10% of total revenues and barely covered its own direct labor and insurance costs.
    • Imagine a firm whose average costs de­crease with sales.
    • However, pricing at average cost for small-scale capacity means that the firm may never discover this.
    • Cost-based pricing is misplaced in industries where there are high fixed costs and near-zero marginal costs.