Average total cost (ATC) represents the cost to produce a single unit of output. It is calculated by dividing the total cost by the total quantity produced.
Formula:
ATC = Total Cost / Quantity (ATC = TC / Q)
You can also calculate it by adding average fixed cost (AFC) and average variable cost (AVC): ATC = AFC + AVC.
The ATC Curve:
The ATC curve is typically U-shaped in the short term because of two factors:
- Falling AFC: As production increases, fixed costs are spread over more units.
- Rising AVC: Eventually, costs increase due to the law of diminishing returns as more variable inputs are added.
Why it matters for businesses:
- If the market price is higher than ATC, the firm makes a profit.
- If the market price equals ATC, the firm breaks even.
- If the market price is lower than ATC but higher than AVC, the firm should keep producing to minimize losses.
- If the market price is lower than AVC, the firm should stop producing (shutdown).