average total cost

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.

• Long Run Market Equilibrium

  • The long-run equilibrium of a perfectly competitive market occurs when marginal revenue equals marginal costs, which is also equal to average total costs.
  • So a firm will produce goods until the marginal costs of production equal the marginal revenues from sales.
  • In a perfectly competitive market, long-run equilibrium will occur when the marginal costs of production equal the average costs of production which also equals marginal revenue from selling the goods.
  • So the equilibrium will be set, graphically, at a three-way intersection between the demand, marginal cost and average total cost curves.
  • Firms can't make economic profit; the best they can do is break even so that their revenues equals their costs.

• 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.

• Shut Down Case

  • Economic shutdown occurs within a firm when the marginal revenue is below average variable cost at the profit-maximizing output.
  • In the short run, a firm that is operating at a loss (where the revenue is less that the total cost or the price is less than the unit cost) must decide to operate or temporarily shutdown.
  • The shutdown rule states that "in the short run a firm should continue to operate if price exceeds average variable costs. "
  • When determining whether to shutdown a firm has to compare the total revenue to the total variable costs.
  • Firms will produce as long as marginal revenue (MR) is greater than average total cost (ATC), even if it is less than the variable, or marginal cost (MC)

• Graphical Representations of Production and Cost Relationships

  • The short-run, total product function and the price of the variable input(s) determine the variable cost (VC or TVC) function.
  • The total variable cost is determined by the price of the variable input and the TP function.
  • The average variable cost is simply the variable cost per unit of output (TP or Q):
  • As the output (Q) increases the average fixed cost (AFC) will decline.
  • The average total cost (ATC) is the total cost per unit of output.

• 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.

• 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).