How is average cost calculated?

Average cost is calculated by taking the total cost of production and dividing it by the total quantity of output produced. This provides a per-unit cost that reflects the expenses incurred in producing each unit of the product. The formula for average cost is:

Average Cost = Total Cost / Total Quantity

This calculation is crucial for businesses as it helps them determine pricing strategies, assess profitability, and make decisions regarding production levels. By understanding average costs, firms can identify whether they are operating efficiently and how changes in output levels can affect their overall costs.