A cost amount calculated by dividing total cost by units of production. 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 fixed costs that remain unchanged throughout a range of output and costs that vary 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.