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 of average fixed cost and average variable cost. Let’s understand.

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

Average Total Cost Formula | Step by Step Calculation

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 remain the same. Its formula is

AFC = Total Fixed Cost/Output = TFC/Q

AFC = ATC – AVC

Average Fixed Cost - Definition, Formula, Examples

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

Average Variable Cost Formula - How to Calculate? (Examples)

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 output:

OutputTCAFC
123
2279
330

Solution:

Step 1: You are given AFC at 2 unit 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/TTCAFCTFCATCAVCTVCMC
123181823555
22791813.54.594
330618104123

Time to Test Yourself

  1. Complete the following table:
OutputTVCAVCMC
110
286
327
41013

2. A firm’s AFC when it produces 2 units is 30. Its ATC schedule is given below. Calculate MC and AVC.

OutputATC
180
248
340

3. If AFC is 20 when firm is producing 3 units. Find MC and ATC:

OutputAVCAFC
130
228
33220

4. If TFC is 120. Find MC and AVC.

OutputATC
1160
296
380

5. Calculate MC and AVC from the following data:

OutputTCAFC
18060
29630
312020

Share your answer on Contact@LearnWithAnjali.com

You can refer to following related topics for more understanding.

1. What is the production function?
2. Terms related to production concept
3. Law of diminishing returns to a factor
4. Total Cost, Total Variable Cost, and Total Fixed Cost
5. The relation between TC, TVC, and TFC

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