toAverage Total Cost - Explained
What is Average Total Cost?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is Average Total Cost?
Average total cost (sometimes referred to simply as average cost) is total cost divided by the quantity of output.
Average total cost starts off relatively high, because at low levels of output total costs are dominated by the fixed cost. Mathematically, the denominator is so small that average total cost is large.
Average total cost then declines, as the fixed costs are spread over an increasing quantity of output. In the average cost calculation, the rise in the numerator of total costs is relatively small compared to the rise in the denominator of quantity produced. However, as output expands still further, the average cost begins to rise. At the right side of the average cost curve, total costs begin rising more rapidly as diminishing returns come into effect.
Related Topics
- Fixed Cost vs Variable Cost
- Actual vs Implicit Costs
- Marginal Cost
- Incremental Cost
- Average Total Cost
- Opportunity Cost
- Opportunity Set
- Sunk Costs
- Cost Curves
- True Cost Economics
- Absolute Advantage