Final answer:
Total cost is the sum of fixed and variable costs, used to calculate the average total cost (ATC) by dividing it by the quantity of output. ATC helps determine profitability and is typically U-shaped on a graph; firms with ATC lower than the market price are making profits.
Step-by-step explanation:
The formula for total cost with output is essential in understanding a company's production expenses. Total cost consists of fixed and variable costs, and it reflects the entire expenditure incurred for producing a given level of output. Fixed costs are the costs that do not change with the output level, such as rent and salaries, while variable costs vary with output, like raw materials and labor hours. To calculate average total cost (ATC), we divide the total cost by the total output at each production level.
For example, if a barber shop's total cost for producing 40 haircuts is $320, the ATC per haircut is calculated by dividing $320 by 40, resulting in an ATC of $8 per haircut. This calculation can be represented by the formula ATC = Total Cost / Quantity of Output. The shape of the ATC curve is typically U-shaped due to the spreading of fixed costs over more units and the eventual increase in variable costs due to factors like diminishing returns.
If a firm's ATC is lower than the market price for its product, it suggests that the firm is making a profit, as the sale price exceeds the cost to produce each unit.