The Average Variable Cost (AVC) curve plots a firm's variable cost per unit of output (TVC divided by quantity) at each level of production. It's U-shaped, and the marginal cost (MC) curve crosses it at its lowest point.
The Average Variable Cost (AVC) curve shows how much variable cost a firm pays per unit of output at every quantity it could produce. You calculate it by dividing total variable costs (TVC) by quantity (Q), so AVC = TVC / Q. Variable costs are the inputs a firm can adjust in the short run, mostly things like labor and raw materials, so AVC tells you how cost-efficient the firm is with those adjustable inputs as it scales production up or down.
The curve is U-shaped. At low output, AVC falls because the firm is spreading variable inputs over a growing output and getting good returns from each added worker or unit of material. Eventually the law of diminishing returns kicks in, each extra variable input adds less and less output, and AVC starts rising again. The bottom of the U is the output level where the firm gets the most output per dollar of variable input.
This lives in Topic 7.3, Costs in the Short Run, where the whole point is understanding how a firm's costs behave when at least one input (usually capital) is fixed. The AVC curve is one of the core short-run cost curves you graph alongside ATC, AFC, and MC, and it's central to figuring out a firm's profit-maximizing output and its shut-down decision. If price drops below the minimum of AVC, the firm can't even cover its variable costs and should shut down in the short run. That single insight ties cost theory directly to firm behavior in every market structure you'll study, from perfect competition to monopoly.
Keep studying Principles of Microeconomics Unit 7
Visual cheatsheet
view galleryMarginal Cost (MC) Curve (Unit 7)
MC always intersects AVC at AVC's minimum point. When MC is below AVC it pulls the average down, and when MC is above AVC it drags the average up, which is exactly why the curves cross at the bottom of the U.
Average Total Cost (ATC) Curve (Unit 7)
ATC sits above AVC because ATC also includes fixed costs. The vertical gap between them is average fixed cost, and that gap shrinks as output rises since fixed costs spread thinner.
Average Fixed Cost (AFC) Curve (Unit 7)
AVC plus AFC equals ATC. Since AFC keeps falling as output grows, AVC and ATC get closer together at higher quantities, which is a quick way to check your graph.
Variable Costs (Unit 7)
AVC is built directly from total variable costs, so anything that changes input prices or production efficiency (like a wage increase) shifts the AVC curve up or down.
Expect to graph the AVC curve correctly relative to ATC and MC: AVC sits below ATC, and MC must pass through the minimum of AVC. Multiple-choice questions often give you a cost table and ask you to compute AVC at a quantity, or they describe a price and ask whether the firm should keep operating or shut down in the short run. On free-response and problem sets, you'll typically draw the full short-run cost set, label the minimum of AVC as the shut-down point, and explain that a firm produces only if price is at or above minimum AVC. Watch for questions linking diminishing returns to why AVC turns upward.
AVC includes only variable costs, while ATC includes both variable and fixed costs. ATC always lies above AVC, and the distance between them is average fixed cost, which keeps shrinking as output rises. Mixing them up usually shows up in shut-down questions: the shut-down point uses AVC, not ATC.
AVC equals total variable costs divided by quantity (AVC = TVC / Q), measuring variable cost per unit.
The AVC curve is U-shaped because of the law of diminishing returns, which eventually makes each extra unit more costly to produce.
The marginal cost curve always intersects the AVC curve at its minimum point.
If price falls below the minimum of AVC, a firm should shut down in the short run because it can't cover its variable costs.
AVC always lies below ATC, and the gap between them equals average fixed cost (AFC).
It's a graph of a firm's variable cost per unit (total variable costs divided by quantity) at each output level. It's U-shaped because of diminishing returns, falling at first and then rising.
Yes. When MC is below AVC it pulls the average down, and when MC is above AVC it pushes the average up, so MC must intersect AVC exactly at AVC's lowest point.
AVC counts only variable costs, while ATC adds fixed costs too, so ATC always sits above AVC. The vertical gap between them is average fixed cost (AFC), and that gap narrows as output increases.
At low output, adding variable inputs raises productivity and lowers cost per unit, so AVC falls. Once diminishing returns set in, each extra input produces less output, so AVC starts rising and forms the U.
A firm should shut down in the short run if the market price falls below the minimum of its AVC, because at that point it can't even cover its variable costs by producing.