In economics, average cost is equal to total cost divided by the number of goods produced (Quantity-Q). It is also equal to the sum of average variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q). A typical average cost curve will have a U-shape, plotting cost on the y-axis and quantity on the x-axis. This is because fixed costs are all incurred before any production takes place and marginal costs are typically increasing, because of diminishing marginal productivity. For low levels of production, there are economies of scale. Marginal costs are below average costs, so average costs are decreasing as quantity increases. An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. This is indicative of diseconomies of scale. Marginal cost is above average costs, so average costs are increasing as quantity increases.

Costs

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