There can be many reasons for calculating averages in economics. At it's simplest an average can be found by adding up a series of numbers and dividing by the number of numbers in the series.
In our example and the practice question we will look at the average house price in an area, which we will calculate by finding the avearge of the last 5 houses sold.
Consider the last 5 houses sold for £140000, £220000, £165000, £200000 and £175000. Average House Price = (£140000 + £220000 + £165000 + £200000 + £175000)/5
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Calculating average costs is important to businesses to know where to set their prices in order to make a profit. Costs will normally include both fixed costs i.e. those we pay regardless of the level of production like rent on our premises and fixed costs i.e. those costs that vary with the level of production such as costs for raw inputs to the production process.
Average cost is found by adding our fixed costs and variable costs and dividing by the number of units produced. It can be expressed in formula form as Average Costs = (Fixed costs + Variable Costs) / number of units produced.
Fixed costs are easy to calculate as we just need to add up the costs involved. Variable costs are calulated by mutliplying the variable cost per item by the number of units produced. So our final formula becomes Average Costs = (Fixed Costs + (Variable cost per unit x number of units produced)) ÷ number of units produced.
Equally that formula can be rewritten as Average Cost = Fixed Costs ÷ Number Of Units Produced + Variable Costs and the result will be the same as seen below.
e.g. A business selling fish and chips has fixed costs of £1500 per month and variable costs of £2 per seving of fish and chips. The average cost per serving if they sell 1000 is:
Average Cost = (£1500 + (£2 x 1000)) ÷ 1000 = £3500 ÷ 1000 = £3.50 per serving.
Or using the 2nd method:
Average Cost = £1500 ÷ 1000 + £2.00 = £1.50 + £2.00 = £3.50 per serving
Both methods work so you can use either below.
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