The following factors determine the firms' average cost of production in both long run and the short run:

• Availability and cost of raw materials. Raw materials are crucial for the production process as they are transformed from inputs to outputs. The cost of raw materials is directly related to the cost of production. This means that a high cost of materials translates to high average and total cost of production.
• Level of output. Average costs are graphically represented by a U-shaped curve in the long run and the short run. Basically, the cost tends to fall when the output is low until the firm fully utilizes its scale of operation, also known as optimal capacity. At this, pointy, continued increase in production or output leads to an increase in the average cost of production because of depleted economies of scale.
• Quantities of inputs needed. There exists a direct correlation between the quantity of inputs needed and the average cost of production. When more inputs such as labor are needed, the average cost of production increases compared to production requiring low quantities of inputs.