Average cost is the sum of average fixed cost and average variable cost. This shows that difference between ATC and AVC is equal to AFC. And total fixed cost (TFC) is constant. Therefore, with the increase in the level of output, AFC falls.
In economics, average cost or unit cost equals total cost divided by number of units produced: displaystyle AC=frac TCQ. The average cost has a significant impact on how enterprises price their commodities.
Average cost includes fixed costs, such as those required for production, which stay constant regardless of output. A fixed cost is the building space and equipment required to assemble a product. Variable costs are included in the average cost.
The average cost of production is calculated by dividing the total cost (TC) by the total output (Q).
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