Average variable cost (AVC)

Definition

Average variable cost (AVC) is the total variable cost divided by the quantity of output produced. It measures the per-unit variable expense associated with production.

5 Must Know Facts For Your Next Test

1. AVC decreases initially as production increases due to spreading out of variable costs over more units.
2. AVC eventually increases after a certain level of output due to diminishing marginal returns.
3. Variable costs are costs that change with the level of output, such as raw materials and labor.
4. The AVC curve is typically U-shaped on a graph.
5. Understanding AVC helps in determining optimal pricing and production strategies.

Review Questions

• How do you calculate Average Variable Cost?
• Why does the AVC curve usually have a U-shape?
• What happens to AVC when output levels increase significantly?

Related terms

Total Variable Cost (TVC): The sum of all variable costs incurred in producing a certain level of output.

Marginal Cost (MC): The additional cost incurred by producing one more unit of a product.

Fixed Costs:

Costs that do not change with the level of output, such as rent and salaries.