A cost amount calculated by dividing the total cost by the units of production. Thus, if a firm produces 10,000 units of output for a total cost of $25,000, the average cost of each unit is $25,000/10,000 units, or $2.50 per unit. Average cost is made up of costs remaining unchanged throughout a range of output and costs varying directly with output. Firms with the lowest average cost in an industry have a competitive advantage in the event of severe competition and price cutting.
