Average cost
Also called: Average total cost, ATC, AC, Unit cost · Topic: Production Function, Returns and Costs · NCERT: Beyond NCERT
Meaning
Average cost is total cost per unit of output. It is also called unit cost. AC = TC / q In the short run, SAC = AVC + AFC (average variable cost plus average fixed cost). SAC is U-shaped. At first it falls, because falling AFC outweighs rising AVC. Later, rising AVC outweighs falling AFC, and SAC rises. Marginal cost cuts SAC from below at SAC's lowest point. In the long run there is no fixed cost, and long-run average cost (LRAC) is U-shaped because of returns to scale.
Example
In NCERT's Table 3.3, the total cost of 7 units is ₹67. So SAC = 67/7 ≈ ₹9.57, the lowest SAC in the table.
Don't confuse with
- Average variable cost: it leaves out fixed cost. The gap between SAC and AVC equals AFC, and it narrows but never closes.
- Marginal cost: the extra cost of one more unit, not cost per unit.