Overview
Average costs are the total costs to the firm divided by the number of units of product produced.
{% Average \; Cost = Total \; Cost / q %}
and
{% Total \; Cost = F + V \times q %}
where
- {% F %} is the fixed cost
- {% V %} is the variable cost
then we will have
{% Average \; Cost = V + \frac{F}{q} %}
Variable Variable Costs
Sometimes, variable costs are not assumed to be a constant amount per unit. That is, as units increase or decrease, the variable amount per product also changes.
As an example, assume that total variable costs is as follows
{% Total \; Variable \; Costs = V \times q + v \times q^2 %}
Then the average costs are given
{% Average \; Cost = V + v\times q + F/q %}
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The slider represents the variable cost {% v %} (sliding the slider right increases {% v %}). When {% v %} is zero, the average costs asymptotically approach a flat cost curve equal to {% V %}. The average cost curve at {% q=1 %} is approximately just the total fixed costs.