Managerial Economics

Average Cost Curves

In chapter 2, we cited average cost as a key performance measure in producing a good or service. Average cost reflects the cost on a per unit basis. A portion of the average cost is the amount of variable costs that can be assigned to the production unit. The other portion is the allocation of fixed costs (specifically those fixed costs that are not sunk), apportioned to each production unit.

The average cost generally varies as a function of the production volume per period. Since fixed costs do not increase with quantity produced, at least in the short run where production capabilities are relatively set, the portion of the average cost attributable to fixed cost is very high for small production volume but declines rapidly ...