(a) Average Cost (AC)
It is per unit cost of production of a commodity. According to Ferguson, "Average cost is total cost divided by output". AC is calculated by dividing the total cost by the number of units produced. Suppose the total cost of production of 25 chairs is र 2,500. In this case, cost per chair or
AC can also be measured by adding AFC and AVC, i.e.,
AC = AFC + AVC
(Remember AC is formally called ATC)
Why is AC curve U-shaped? It means that initially it falls, after reaching its minimum, it starts rising. AC curve is depicted in Fig. AC curve in short period is a U-shaped curve due to operation of law of variable proportion. Remember, increasing returns imply diminishing costs, constant returns mean constant costs and diminishing returns imply increasing costs. As output is increased, initially AC falls due to operation of law of increasing returns, reaches its minimum and then rises due to diminishing returns. Hence, AC curve becomes U-shaped. Minimum point of AC curve indicates lowest per unit cost or production.
