Posted by
Anjali Kaur
on
Sep 04, 2020
Average Total Cost
Average total cost in economics plays an important role in understanding how the firm cost of production falls over a period. Average total cost comprises average fixed cost and average variable cost. Let’s understand.
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Average Cost
The average cost (AC), the unit cost of production, and the average total cost (ATC) are the same. The average total cost is the cost per unit of output.
It shows as the output increases, the value of average cost falls continuously till it reaches a minimum point, and then it starts to rise again. Its formula is
ATC = Total Cost/ Output = TC/Q
ATC = Average Fixed Cost + Average Variable Cost = AFC + AVC
ATC is ‘U shaped:
Average Fixed Cost
Average fixed cost is defined as the fixed cost of producing per unit of a commodity.
AFC falls continuously with the rise in the level of output. However, it never becomes 0.
Average fixed cost is also known as rectangular hyperbola because the area under the curve always remains the same. Its formula is
AFC = Total Fixed Cost/Output = TFC/Q
AFC = ATC – AVC
AFC curve:
Average Variable Cost
Average variable cost is defined as the variable cost of producing per unit of a commodity.
Its formula is:
AVC = Total Variable Cost/ Output = TVC/Q
AVC = ATC – AFC
AVC is U shaped:
Let’s recall all the important formulas related to costs:
Now, you know all the formulas then you should understand the problems related to them.
Q1 A firm AFC of producing 2 units of a good is Rs 9 and given below is its TC schedule. Calculate AVC and MC for each of the following outputs:
| Output | TC | AFC |
|---|---|---|
| 1 | 23 | |
| 2 | 27 | 9 |
| 3 | 30 |
Solution:
Step 1: You are given AFC at 2 units of output as 9. Use AFC to find Total Fixed Cost.
AFC = TFC/Q
9 = TFC/2
TFC = 18
TFC remains fixed irrespective of the level of ouput
Step 2: You have TFC as 9. Use TFC to complete the AFC table.
AFC = TFC/Q
At 1 unit of output, AFC = 9/1 = 9
At 3 unit of output, AFC = 9/3 = 3
Step 3: Find ATC. As we have TC, we can find ATC using, ATC = TC/Q
Step 4: Calculate AVC using the formula AVC = ATC – AFC
Step 5: Find TVC using TVC = TC- TFC
Step 6: MC = Change in TVC/ Change in output
As shown below, the complete solution:
| O/T | TC | AFC | TFC | ATC | AVC | TVC | MC |
|---|---|---|---|---|---|---|---|
| 1 | 23 | 18 | 18 | 23 | 5 | 5 | 5 |
| 2 | 27 | 9 | 18 | 13.5 | 4.5 | 9 | 4 |
| 3 | 30 | 6 | 18 | 10 | 4 | 12 | 3 |
Time to Test Yourself
- Complete the following table:
| Output | TVC | AVC | MC |
|---|---|---|---|
| 1 | 10 | ||
| 2 | 8 | 6 | |
| 3 | 27 | ||
| 4 | 10 | 13 |
2. A firm’s AFC when it produces 2 units is 30. Its ATC schedule is given below. Calculate MC and AVC.
| Output | ATC |
|---|---|
| 1 | 80 |
| 2 | 48 |
| 3 | 40 |
3. If AFC is 20 when firm is producing 3 units. Find MC and ATC:
| Output | AVC | AFC |
|---|---|---|
| 1 | 30 | |
| 2 | 28 | |
| 3 | 32 | 20 |
4. If TFC is 120. Find MC and AVC.
| Output | ATC |
|---|---|
| 1 | 160 |
| 2 | 96 |
| 3 | 80 |
5. Calculate MC and AVC from the following data:
| Output | TC | AFC |
|---|---|---|
| 1 | 80 | 60 |
| 2 | 96 | 30 |
| 3 | 120 | 20 |
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You can refer to the following related topics for more understanding.
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You can read more related posts:
- Introduction to Economics
- What do you mean by an economy?
- What are the Central problems of the economy?
- Production Possibility Curve
- What causes PPC to shift?
- What does the opportunity cost mean?
- The point on and off the Production Possibility Curve
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