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What Is... the difference between total costs and average or unit costs?
Economies of scale are the advantages of large-scale production that result in lower costs per unit (average costs).
A common error made by students is to think that by being big, a firm can reduce its 'costs'. This is wrong. The bigger the firm, the higher the costs are likely to be (obviously). But it is possible for unit or average costs to fall.
Example of the difference between total costs and average/unit costs
Image copyright: Michal Zacharzewski, from stock.xchng.
Susan wants to hire a coach from Bristol to Manchester to take her to the U2 concert. The coach company gives her a quote of £480 for a 60-seater coach. She obviously thinks this is far too much but needs to get to Manchester. She advertises in the local press to ask if others want to join her.
The first response she gets cuts the cost per traveller to £240 each. Two more people phone, which means that the cost per person is now only £120. The more people Susan recruits, the lower the unit cost. She eventually manages to get all the seats full and so the cost per person is £8.00.
In this example, the total cost is £500 but the average or unit cost is the cost per passenger. For a business, knowing total costs is important but equally, knowing the unit costs is also an important part of their planning process.
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