Monday, June 27, 2011

verage Total Cost

The average total cost or what is simply called average cost is the total cost divided by the number of units of output produced.

Average total cost = total cost / output

Or ATC = TC/ Q   

Since the total cost is the sum of total variable cost and the total fixed cost the average total cost.

Is also the sum of average variable cost and average fixed cost? This can be proved as follows:

ATC = TC / Q

Since TC = TVC + TEC

Therefore ATC = TVC + TFC / Q = TVC / Q + TFC / Q = AVC + AFC

Average total cost is also known as units cost since it is cost per unit of output produced. As the average total cost is the sum of average variable cost and average fixed cost, in it can be obtained by summing up the figures of columns 5 and 6 corresponding to different levels of output, thus for example with two units of output average total cost is $ 25 + $ 17.50 = $ 24.50 and with three units of output it is equal to $ 16.67 + $ 20 = $ 36.67 and so on for other levels of output. Alternatively the average total cost can be obtained directly form dividing the total cost by the number of units of output product. Thus average total cost of 2 units of output is equal to $ 85/2 ro $ 42.50 likewise when output is readied to 6 units total cost rises to 240 and average total cost words out to be $ 240/6 = $ 40.

If follows from above that the behaviour of the average total cost curve will depend upon the dehaviour of the average variable cost curve and average fixed cost curve. In the beginning both AVC and AFC curve is falling steeply’ the ATC curve continues to fall. This is because during this stage the fall in AFC neither curve weight nor than the rise in the AVC curve. But as output increases further there is a sharp rise in AVC which more than offsets the fall in AFC. Therefore the ATC curve rises after a point. Thus the average total cost curve (ATC) like the AVC curve first falls reaches its minimum value and then rises. The average total cost curve (ATC) is therefore almost of a U shape.

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