Average total cost

Average total cost is the cost of making all of the widgets divided by the number of widgets made. If one widget costs $10,000 for the machinery plus $600 for the workforce and material, and the second widget only costs $50 (for the material) but doesn't require extra machinery or workers, the average cost for those widgets would be $5,325, the total cost ($10,650) divided by the number of widgets (2).

Average cost is often, but not always, greater than Marginal cost. Once you pay for the machinery and workers, it doesn't cost much to make one more widget. While the average cost described above is thousands of dollars, the marginal cost in the same situation is only $50 (for the supplies). When you make more widgets, the average price decreases. If you made 10 widgets, and each widget after the first costs $50, the average price would be 1,110, the total cost ($11,100) divided by the number of widgets (10). This is called economies of scale: the bigger your operation is, the cheaper you can make one more widget.

The Average total cost could also be found by adding the Average variable cost and the Average fixed cost for a widget.

Relationship to Marginal Cost

When average cost is declining as output increases, marginal cost is less than average cost. When average cost is rising, marginal cost is greater than average cost. When average cost is neither rising nor falling (at a minimum or maximum), marginal cost equals average cost.