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Economics: Calculating Average Total Cost

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About this Lesson

  • Type: Video Tutorial
  • Length: 4:51
  • Media: Video/mp4
  • Use: Watch Online & Download
  • Access Period: Unrestricted
  • Download: MP4 (iPod compatible)
  • Size: 52 MB
  • Posted: 03/29/2010

This lesson is part of the following series:

Economics: Full Course (269 lessons, $198.00)
Economics: Production and Costs (24 lessons, $39.60)
Economics: Total Costs (3 lessons, $4.95)

This video lesson focuses on the calculation of Average Total Cost (ATC). Taught by Professor Tomlinson, this video lesson was selected from a broader, comprehensive course, Economics. This course and others are available from Thinkwell, Inc. The full course can be found at http://www.thinkwell.com/student/product/economics. The full course covers economic thinking, markets, consumer choice, household behavior, production, costs, perfect competition, market models, resource markets, market failures, market outcomes, macroeconomics, macroeconomic measurements, economic fluctuations, unemployment, inflation, the aggregate expenditures model, banking, spending, saving, investing, aggregate demand and aggregate supply model, monetary policy, fiscal policy, productivity and growth, and international examples.

Steven Tomlinson teaches economics at the Acton School of Business in Austin, Texas. He graduated with highest honors from the University of Oklahoma and earned a Ph.D. in economics at Stanford University. Prof. Tomlinson's academic awards include the prestigious Texas Excellence Teaching Award given by the University of Texas Alumni Association and being named "Outstanding Core Faculty in the MBA Program" several times. He has developed several instructional guides and computerized educational programs for economics.

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Thinkwell
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We've been talking about the total cost of producing a given quantity of television sets. Eventually you're going to want to figure out whether your operation is profitable or not. And in order to figure that out, you're going to need to compare the money that you earned from selling a television set with the cost of producing a television set. In order to find the cost of producing an individual television set, you're going to need a new cost concept, and that is the concept of average total cost.
Average total cost is the total cost of producing television sets divided by the number produced. It tells you the labor cost as well as the cost of all of the other materials that go into making an individual television set: average total cost. Average total cost is defined as total cost of production divided by the number of units of output produced.
Let's look at some numbers. We calculated the total cost of producing any given number of television sets. For example, if you produce two television sets you're going to have a total cost of $11,000. 1,000 for labor and 10,000 for fixed costs. If you divide 11,000 by two television sets you find out that the total cost on average is $5,500. That is, it costs $5,500 when you're producing two television sets to produce one television set. 5,500 is the average total cost. Well, you can follow this logic on down the page and calculate the average total cost when you're producing 10, 30, 40, 45, and so forth.
So the first method of calculating average total cost is to take the total cost of production and divide by the number of television sets produced. There's also another way of calculating average total cost and this one is going to turn out to be useful to us in a minute when we derive the average total cost curve graphically. Remember, total cost can be broken into two components: fixed cost and variable cost. If you think about it, fixed cost and variable cost can both be divided by the total number of units of output just like we can divide the total cost by the total number of units of output. Total cost divided by the total output is equal to average total cost. But you know that the total cost is just equal to the variable cost, that is the cost of the labor that goes into production, plus the fixed costs, the costs of the fixed inputs.
Well, if we divide both sides of this equation by the total number of television sets produced, you can see another way, a way that might be easier sometimes, of calculating average total cost. Divide both sides by the total number of televisions produced, that is the total product, and you get this: total cost divided by total product is equal to variable costs divided by total product plus fixed costs divided by total product. But you know what these two terms are. Each of these terms has its own definition. Variable costs divided by total product is what? That's right; it's the average variable cost. And fixed costs divided by total product is what? It's the average fixed costs. So, the total cost on average, the average total cost, is equal to the average variable cost plus the average fixed costs.
Now you can see that if we look at our numbers. Average variable cost is right here. Average fixed cost is right here. And here's our schedule that tells us how many televisions we're producing. If we put all of these together, and I don't want the marginal cost curve at all, that's the curve I don't want. The curve that I want is average total cost, which I've put over here. Look; in each case the average total cost of producing a given number of television sets is equal to the average variable cost plus the average fixed cost. 200 plus 1,000 is 1,200. 111 plus 222 is equal to 333.
By way of summary, let me say this: there are two ways of calculating the average total cost. One is taking the total cost and dividing by total output. The other way is to add together the average variable cost and the average fixed costs. That gives you average total costs. Now, we'll represent all of these curves together in a single graph. We'll put the average variable cost curve together with the average fixed cost curve and derive the average total cost curve. And the method that we'll use is the method of vertical summation. The same method we used a little while ago when we first drew the total cost curve.
Production and Costs
Total Costs
Calculating Average Total Cost Page [1 of 1]

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