Question

What is meant by "Average Cost"?

Hint:

Remember that Average Cost is the sum of Average Fixed Cost (AFC) and Average Variable Cost (AVC). Its U-shape is a result of combining the continuously falling AFC and the U-shaped AVC.

Answer 1

Step 1: Understanding the Concept:
The question asks for the definition of Average Cost, which is a key concept in the theory of production and costs.

Step 2: Detailed Explanation:
Average Cost (AC), also known as Average Total Cost (ATC), is the per-unit cost of production. It is calculated by dividing the Total Cost (TC) of production by the total quantity of output (Q) produced.
The formula for Average Cost is: \[ AC = \frac{TC}{Q} \] Average Cost gives a firm an idea of the cost of producing a typical unit of output. It is a crucial factor in determining the profitability of a firm (Profit per unit = Price - Average Cost).
The Average Cost curve is typically U-shaped, reflecting the law of variable proportions. It falls initially due to economies of scale and then rises due to diseconomies of scale.

Step 3: Final Answer:
Average Cost is the cost of production per unit of output, calculated by dividing the total cost by the number of units produced.