Google
Sunday 
November 23, 2014 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
Today's Index
Yesterday's Index
236.1

Help us compile the AmosWEB Free Lunch Index. Tell us about your last lunch.

Skipped lunch altogether.
Bought by another.
Ate lunch at home.
Brought lunch from home.
Fast food drive through.
Fast food dine in.
All-you-can eat buffet.
Casual dining with tip.
Fancy upscale with tip.

More About the Index
Favorite dead person to dine with?

Abraham Lincoln.
Jesus.
Albert Einstein.
Adam Smith.
Socrates.
Buddha.

MACROECONOMIC MARKETS: Three sets of markets that make up the macroeconomy--product, financial, and resource--which exchange the three primary types of macroeconomic commodities--gross production, legal claims, and factor services. The four macroeconomic sectors--household, business, government, and foreign--interact through these three sets of markets. The primary objective of macroeconomic theories is to explain activity that takes place in these three sets of markets.

Visit the GLOSS*arama


AVERAGE TOTAL COST:

Total cost per unit of output, found by dividing total cost by the quantity of output. When compared with price (per unit revenue), average total cost (ATC) indicates the per unit profitability of a profit-maximizing firm. Average total cost is one of three average cost concepts important to short-run production analysis. The other two are average fixed cost and average variable cost. A related concept is marginal cost.
Average total cost is the total cost per unit of output incurred when a firm engages in short-run production. It can be found in two ways. Because average total cost is total cost per unit of output, it can be found by dividing total cost by the quantity of output. Alternatively, because total cost is the sum of total variable cost and total fixed cost, average total cost can be derived by summing average variable cost and average fixed cost.

In general, average total cost decreases with additional production at relatively small quantities of output, then eventually increases with relatively large quantities of output. This pattern is illustrated by a U-shaped average total cost curve.

Average total cost, when combined with price, determines per unit profit or loss that a profit-maximizing firm receives from short-run production. If price is greater than average total cost, then the firm receives positive economic profit per unit. If price is less than average total cost, the firm incurs a loss, or negative economic profit, per unit. If price is equal to average total cost, then the firm is just breaking even, receiving neither a per unit profit nor incurring a per unit loss.

Calculating Average Total Cost

The standard method of calculating average total cost is to divide total cost by the quantity, illustrated by this equation:
average total cost=total cost
quantity of output
An alternative specification for average total cost is found by summing average variable cost and average fixed cost:
average total cost = average variable cost + average fixed cost
An alternative equation computes total cost from average total cost:
total cost = average total cost x quantity of output

Stuffed Animal Cost

Average Total Cost
Average Total Cost



Insight into average total cost can be had using the table to the right, which presents the total cost of producing Wacky Willy Stuffed Amigos. The first column is the quantity of Stuffed Amigos rolling off the assembly line, ranging from 0 to 10. The second column is the total cost of producing each quantity, ranging from $3 to $46. If 5 Stuffed Amigos are produced, then the total cost incurred in their production is $16. The production of 9 Stuffed Amigos, in comparison, incurs a total cost of $34.

Deriving average total cost is as simple as dividing the second column of total cost values by the first column of output quantity values. The average total cost of producing 1 Stuffed Amigo is relatively easy--divide $8 by 1 Stuffed Amigo. If the result of this calculation is not readily obvious, click the [One] button.

The average total cost of two Stuffed Amigos might be a little less obvious, but not much. Click the [Two] button to reveal that the average total cost is $5.50, which is $11 divided by 2 Stuffed Amigos. A click of the [Three] shows that the average total cost of producing 3 Stuffed Amigos is $4.33, $13 divided by 3. The remaining average total cost values can be displayed by clicking the [Remaining] button.

With all numbers displayed, what interesting insight into average total cost can be had?

  • First, average total cost is relatively high for the first Stuffed Amigo produced, then declines. However, it reaches a low, then rises with production of the last few Stuffed Amigos.

  • Second, average total cost remains positive, it never reaches a zero value and never turns negative. The only way for negative average total cost is for negative total cost, which makes no theoretical or practical sense.

  • Third, the average total cost values in this table are comprised of two parts--average variable cost and average fixed cost. In other words, the $4.60 average total cost of producing 10 Stuffed Amigos can be broken down into something like $4.30 of average variable cost and $0.30 of average fixed cost.

The Average Total Cost Curve

Average Total Cost Curve
Average Total Cost Curve
The relation between average total cost and the quantity of production can be represented by a curve, such as the one conveniently presented in the exhibit to the right.

The key feature of this average total cost is the shape. It is U-shaped, meaning it has a negative slope for small quantities of output, reaches a minimum value, then has a positive slope for larger quantities. This U-shape is indirectly attributable to the law of diminishing marginal returns.

While it would be easy to attribute the U-shape of the average total cost curve to increasing, then decreasing marginal returns (and the law of diminishing marginal returns), such is not completely true. While the law of diminishing marginal returns is indirectly responsible for the positively-sloped portion of the average total cost curve, the negatively-sloped portion is attributable to increasing marginal returns, and perhaps more importantly to declining average fixed cost.

<= AVERAGE REVENUE PRODUCT CURVEAVERAGE TOTAL COST CURVE =>


Recommended Citation:

AVERAGE TOTAL COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: November 23, 2014].


Check Out These Related Terms...

     | average cost | average total cost curve | average fixed cost | average variable cost | average fixed cost curve | average variable cost curve | total cost | total cost curve | variable cost | fixed cost | marginal cost |


Or For A Little Background...

     | opportunity cost | production | production cost | business | factors of production | microeconomics | short-run production analysis | law of diminishing marginal returns | marginal returns | marginal analysis | average product |


And For Further Study...

     | total variable cost | total variable cost curve | total fixed cost | total fixed cost curve | total cost and marginal cost | total cost curves | total variable cost and total product | legal business organizations | firm objectives | opportunity cost, production possibilities | profit | economic profit | accounting profit | normal profit | accounting cost | profit maximization | long-run average cost | U-shaped cost curves |


Search Again?

Back to the WEB*pedia


APLS

State of the ECONOMY

Personal Income
September 2014
$14,892.6 billion
Up 0.2% from August 2014

More Stats

GREEN LOGIGUIN
[What's This?]

Today, you are likely to spend a great deal of time wandering around the downtown area trying to buy either storage boxes for your income tax returns or an AC adapter for your CD player. Be on the lookout for infected paper cuts.
Your Complete Scope

This isn't me! What am I?

There were no banks in colonial America before the U.S. Revolutionary War. Anyone seeking a loan did so from another individual.
"A man flattened by an opponent can get up again. A man flattened by conformity stays down for good. "

-- Thomas Watson Jr., executive

PVR
Profit Volume Ratio
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2014 AmosWEB*LLC
Send comments or questions to: WebMaster