Definition: The Average Cost is the per unit cost of production obtained by dividing the total cost (TC) by the total output (Q). By per unit cost of production, we mean that all the fixed and variable cost is taken into the consideration for calculating the average cost. Thus, it is also called as Per Unit Total Cost.
Symbolically, the average cost is expressed as:
AC = TC/Q
AC = Average Variable cost (AVC) + Average Fixed cost (AFC)
Average variable cost = Total Variable Cost (TVC) / Total output (Q)
Average fixed cost = Total Fixed Cost (TFC) / Total output (Q)
The average cost is greatly influenced by the time period of production, such as increasing or expanding the production in the short run might be quite expensive or impossible. Thus, the economists study both the short-run average costs and long-run average costs to decide the production for a given period.
The short-run average cost is the cost that varies with the production of goods, provided the fixed costs are zero, and the variable costs are constant. While the long-run average cost includes all the cost involved in the variation of the quantities of all the inputs used for the production. The long-run is the time period wherein the quantities of all the inputs to be used can vary, even capital. Thus, the average cost is an important factor in determining the supply and demand within the market.