Average Total Cost
What is Average Total Cost?
Average Total Cost is the total cost per unit of output produced.
It is found by dividing total cost by the quantity of output. Average total cost includes both average fixed and average variable costs and typically forms a U-shaped curve due to spreading fixed costs and diminishing returns.
Average Total Cost: a worked example
A workshop pays $400 a month for its space no matter what it builds. At 50 units, variable cost is $350, so total cost is $750 and ATC = 750 ÷ 50 = $15. At 100 units, variable cost is $600, total cost is $1,000, and ATC = 1,000 ÷ 100 = $10. At 250 units the shop is crowded and variable cost reaches $2,600, so total cost is $3,000 and ATC = 3,000 ÷ 250 = $12. Those three readings, $15 then $10 then $12, trace the U. The pieces check out at 250 units, where AFC = 400 ÷ 250 = $1.60 and AVC = 2,600 ÷ 250 = $10.40, and $1.60 + $10.40 = $12.
The mistake students make with average total cost
Seeing marginal cost rise, students immediately mark average total cost as rising too. The intuition feels safe because the last unit did cost more than the one before it. What matters is where marginal cost sits relative to ATC, not which way it moved. If ATC is $10 at 100 units and the 101st unit costs $7, total cost goes to $1,007 and ATC falls to about $9.97, even though marginal cost rose from $5. ATC keeps falling while MC is below it and only turns up after MC cuts through the minimum.
Average Total Cost questions
Why is the average total cost curve U shaped?
Two forces work against each other. At low output, average fixed cost falls steeply as the fixed bill is spread over more units, dragging ATC down. At higher output, diminishing marginal returns push average variable cost up faster than average fixed cost keeps falling, so ATC turns around. The bottom of the U sits where those two pulls cancel, which is also where marginal cost passes through ATC.
How do you calculate profit using average total cost?
Profit per unit equals price minus ATC, and total profit equals that gap times quantity. A firm selling 300 units at $14 with an ATC of $11 earns $3 per unit and $900 overall. On a graph, that profit is the rectangle between the price line and the ATC curve at the profit maximizing quantity, which is why AP graders look for ATC to be labeled at the correct output.
Is average total cost the same as marginal cost?
Average total cost and marginal cost answer different questions. ATC spreads every dollar spent over every unit made, while marginal cost counts only the added cost of the next unit. The two are equal at exactly one output, the minimum of ATC, where the marginal cost curve passes through. Below that quantity marginal cost sits under ATC and pulls it down; above it, marginal cost sits above ATC and pushes it up.
Formula / Example
This is the live Production Costs sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
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