Average Cost and Marginal Cost

 Average cost is the cost per unit manufactured in a production run. It represents the average amount of money spent to produce a product. This amount can vary, depending on the number of units produced.

In economics, average cost or unit cost is equal to total cost (TC) divided by the number of units of a good produced (the output Q):

{displaystyle AC={frac {TC}{Q}}.}

Average cost has strong implication to how firms will choose to price their commodities. Firms’ sale of commodities of certain kind is strictly related to the size of the certain market and how the rivals would choose to act.

Long-run average cost is the unit cost of producing a certain output when all inputs, even physical capital, are variable. The behavioral assumption is that the firm will choose that combination of inputs that produce the desired quantity at the lowest possible cost.

A long-run average cost curve is typically downward sloping at relatively low levels of output, and upward or downward sloping at relatively high levels of output. Most commonly, the long-run average cost curve is U-shaped, by definition reflecting economies of scale where negatively sloped and diseconomies of scale where positively sloped.

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