same graph, the lines for marginal cost, average cost, and average variable cost would appear almost flat against the

horizontal axis, compared to the values for total cost, fixed cost, and variable cost. Using the figures from the

previous example, the total cost of producing 40 haircuts is $320. However, the average cost is $320/40, or $8. If

you graphed both total and average cost on the same axes, the average cost would hardly show.

Average cost tells a firm whether it can earn profits given the current price in the market. If we divide profit by

the quantity of output produced we get average profit, also known as the firm’s profit margin. Expanding the

equation for profit gives:
172 7 • Production, Costs, and Industry Structure

However, note that:

Thus:

This is the firm’s profit margin. This definition implies that if the market price is above average cost, average
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