Average Cost
Average Costs are the per unit costs which explain the relationship between the cost and output in a realistic manner. These per-unit costs are obtained from Total Fixed Cost, Total Variable Cost, and Total Cost. The three different types of per-unit costs are as follows:
I. Average Fixed Cost (AFC):
The per unit fixed cost of production is known as Average Fixed Cost. The formula for calculating Average Fixed Cost is:
[Tex]Average~Fixed~Cost~(AFC)=\frac{Total~Fixed~Cost~(TFC)}{Quantity~of~Output~(Q)} [/Tex]
With an increase in the output, Average Fixed Cost falls. It is because the total fixed cost remains the same at all output levels.
AFC curve does not touches X-axis and Y-axis.
AFC is a rectangular hyperbola and hence approaches both the axes. The curve gets near to the axes, but never touches them. It means that AFC can neither touch X-axis (because TFC can never be zero) nor Y-axis (because TFC is positive at zero output level and if we divide any value by zero, it will be an infinite value).
II. Average Variable Cost (AVC):
The per unit variable cost of production is known as Average Variable Cost. The formula for calculating Average Variable Cost is:
[Tex]Average~Variable~Cost~(AVC)=\frac{Total~Variable~Cost~(TVC)}{Quantity~of~Output~(Q)} [/Tex]
Initially, Average Variable Cost falls with an increase in output. Once the output increases till the optimum level, the average variable cost starts to rise.
III. Average Total Cost (ATC) or Average Cost (AC):
The per unit total cost of production is known as Average Total Cost or Average Cost. The formula for calculating Average Total Cost is:
[Tex]Average~Cost~(AC)=\frac{Total~Cost~(TC)}{Quantity~of~Output~(Q)} [/Tex]
Another way to define Average Total Cost is by the sum of Average Fixed Cost and Average Variable Cost; i.e., AC = AFC + AVC.
Just like Average Variable Cost, average cost also initially falls with an increase in output. Once the output increases till the optimum level, the average cost starts to rise.