Average Cost - Short-run Average Cost

Short-run Average Cost

Average cost is distinct from the price, and depends on the interaction with demand through elasticity of demand and elasticity of supply. In cases of perfect competition, price may be lower than average cost due to marginal cost pricing.

Short-run average cost will vary in relation to the quantity produced unless fixed costs are zero and variable costs constant. A cost curve can be plotted, with cost on the y-axis and quantity on the x-axis. Marginal costs are often shown on these graphs, with marginal cost representing the cost of the last unit produced at each point; marginal costs are the slope of the cost curve or the first derivative of total or variable costs.

A typical average cost curve will have a U-shape, because fixed costs are all incurred before any production takes place and marginal costs are typically increasing, because of diminishing marginal productivity. In this "typical" case, for low levels of production marginal costs are below average costs, so average costs are decreasing as quantity increases. An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. For further increases in production beyond this minimum, marginal cost is above average costs, so average costs are increasing as quantity increases. An example of this typical case would be a factory designed to produce a specific quantity of widgets per period: below a certain production level, average cost is higher due to under-utilised equipment, while above that level, production bottlenecks increase the average cost.

Read more about this topic:  Average Cost

Famous quotes containing the words average and/or cost:

    In the middle classes the gifted son of a family is always the poorest—usually a writer or artist with no sense for speculation—and in a family of peasants, where the average comfort is just over penury, the gifted son sinks also, and is soon a tramp on the roadside.
    —J.M. (John Millington)

    Oh high is the price of parenthood,
    And daughters may cost you double.
    You dare not forget, as you thought you could,
    That youth is a plague and a trouble.
    Phyllis McGinley (20th century)