Decreasing Average Total Costs
Definition
Decreasing average total costs occur when the average cost per unit decreases as output increases. It indicates that the firm is becoming more efficient at producing goods or services.
Analogy
Picture decreasing average total costs as getting discounts at your favorite store for buying more items. As you buy more items (increase output), your average cost per item (total cost divided by quantity) decreases because you're getting better deals.
Related terms
Marginal Cost: The additional cost incurred by producing one more unit of output.
Economies of Scope: Cost savings that a firm achieves by producing multiple products or services together.
Long Run Average Total Cost (LRATC): The average total cost when all inputs are variable and the firm can adjust its scale of production.
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