Juan Aquino Average Cost Lesson Post 4

Good evening class, My name is Professor Aquino and I will be substituting Professor Little today, unfortunately Professor Little cant make it to today’s class because she is vacationing at Hawaii! Luckily, today’s lesson is something that I master and can easily instruct you in. To all of those students who are studying economics or a business related field you will see that this topic is extremely important in order to one day run your own business or to work in any company. Today I am going to talk all of you about the concept of average cost.

Many of you are wondering what is average cost?

It is the average cost per unit of producing a certain quantity,: it is the total cost divided by the number of units produced.

Before we move on we must remember what the units in the equation signify. First of we will review what the total cost function represents.

There are two types of costs variable and fixed.

Variable costs- are costs whose amount vary depending on the number of units produced. For example if you own a lemonade stand and you need to buy the lemons to make the lemonade your costs made fluctuate with the amount of lemons you buy. The difference between buying 30 lemons or 40 lemons can change significantly.

Fixed costs- are costs that will stay the same no matter the time period or quantity and must be paid consistently. An example of this would be the rent of an apartment, the transportation expenses of a food distributor or even the electricity bill. These costs cannot be evaded and will always be present.

Once you find your fixed and variable costs you add them all up and you have your total costs.

The last input we are missing would be the quantity which simply tells us the amount produced.

The formula would be the following :  a(q) =  C(q)/ q

Now lets use a real world example to further understand. Imagine you run a bakery that produces 20 cupcakes per hour. The bakery pays 10 dollars in flour each day that cannot be eliminated. The company also pays 4 dollars for frosting depending on the quantity made.  Now estimate the average cost for producing 20 cupcakes.

A(q)= C(q)/q   =   total costs/ quantity = 10+4(20)/ 20 = $4.50

The average cost of producing 20 units is $4.50. It is important to not confuse the AC with the marginal cost which represents the cost of producing one more unit.

Hope you enjoyed the lesson!