Average Cost (AC) or Average Total Cost (ATC) refers to per unit cost of production a given quantity of output. Average cost is equal to total cost of all the units of output produced divided by the number of units or total quantity (Q) of output produced. Thus,
AC = TC /Q
As is clear from total production is following the Law of Variable Proportions. Since total cost initially rises slower than the output, average cost is falling. But ultimately production growth becomes lower than the growth rate of total cost and thus average cost starts increasing.
