AmosWEB defines average cost as the opportunity cost incurred per unit of good produced.
A generic formula for calculating average cost is specified as:
average cost = total cost / quantity of output
AmosWEB notes while average cost is a general term relating cost and the quantity of output, three specific average cost terms are average total cost, average variable cost, and average fixed cost:
- Average total cost: This is per unit total cost, or total cost divided by the quantity of output produced. Average total cost is also the sum of average fixed cost and average variable cost.
- Average fixed cost: This is per unit total fixed cost, or total fixed cost divided by the quantity of output produced. Because fixed cost does not vary with output, average fixed cost declines with larger quantities of production.
- Average variable cost: This is per unit total variable cost, or total variable cost divided by the quantity of output produced. Average variable cost is influenced by short-run marginal returns, decreasing for small quantities, then increasing for larger quantities.
Atlas topic, subject, and course
AmosWEB, at http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=average+cost, accessed 30 April 2016.
Page created by: Ian Clark, last modified 30 April 2016.
Image: Gianfranco Uber, at http://www.cartoonmovement.com/cartoon/14923, accessed 30 April 2016.