Average cost is total cost divided by the quantity of output produced.
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The formula
$$ AC = \frac{TC}{Q} $$
where (TC) is total cost and (Q) is output.
Why economists use it
Average cost helps show how expensive each unit is on average, but it is not the same as marginal cost. That distinction matters because firms often make output decisions at the margin even though long-run viability depends on whether price covers average cost.
What shapes average cost
Average cost can fall when fixed costs are spread over more output, then flatten or rise if congestion, complexity, or other diseconomies set in. That is why many cost curves are drawn as U-shaped in introductory microeconomics.
Related Terms
Knowledge Check
### Average cost equals:
- [x] total cost divided by output
- [ ] total revenue divided by output
- [ ] marginal cost minus price
- [ ] fixed cost minus variable cost
> **Explanation:** It is the per-unit cost based on total cost.
### Why is average cost different from marginal cost?
- [x] Average cost is the cost per unit overall, while marginal cost is the cost of one more unit
- [ ] They are always identical
- [ ] Marginal cost ignores production
- [ ] Average cost applies only to households
> **Explanation:** The two concepts answer different economic questions.
### A fall in average cost as output rises often reflects:
- [x] fixed costs being spread over more units
- [ ] the disappearance of all variable costs
- [ ] inflation by definition
- [ ] a ban on competition
> **Explanation:** Scale can lower average cost when fixed costs are important.