--- title: "Average Variable Cost (AVC) Curve — Microeconomics Guide" description: "The Average Variable Cost (AVC) curve shows variable cost per unit as output changes. Learn its U-shape, why MC cuts its minimum, and how it drives shut-down decisions." canonical: "https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve" type: "key-term" subject: "Principles of Microeconomics" unit: "Unit 7" --- # Average Variable Cost (AVC) Curve — Microeconomics Guide ## Definition 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. ## What It Is 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. ## Why It Matters 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. ## Connections ### Marginal 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)](/principles-microeconomics/key-terms/average-total-cost-atc-curve) 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)](/principles-microeconomics/key-terms/average-fixed-cost-afc-curve) 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. ## On the AP Exam 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. ## Average Variable Cost (AVC) Curve vs Average Total Cost (ATC) Curve 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. ## Key Takeaways - 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). ## FAQs ### What is the Average Variable Cost (AVC) curve? 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. ### Does the marginal cost curve always cross AVC at its minimum? 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. ### How is the AVC curve different from the ATC curve? 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. ### Why is the AVC curve U-shaped? 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. ### When should a firm shut down based on AVC? 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. ## Related Study Guides - [7.3 Costs in the Short Run](/principles-microeconomics/unit-7/3-costs-short-run/study-guide/VyxvmM0BFO2HL3Pa) ## About This Document Canonical Fiveable pages are available as Markdown at the same path plus `.md`. - [llms.txt](https://fiveable.me/llms.txt): index of Fiveable's sections and URL patterns - [llms-full.txt](https://fiveable.me/llms-full.txt): complete subject and unit listing - [MCP server](https://fiveable.me/mcp): call Fiveable as tools instead of fetching pages (`https://fiveable.me/api/mcp`) - [MCP server for AP teachers](https://fiveable.me/mcp/teachers): a teacher's classes, assignments and AP-rubric grading (`https://fiveable.me/api/mcp/teacher`) ## Structured Data ```json {"@context":"https://schema.org","@graph":[{"@type":"LearningResource","@id":"https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve#resource","name":"Average Variable Cost (AVC) Curve — Microeconomics Guide","url":"https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve","learningResourceType":"Concept explainer","educationalLevel":"AP® / High School","about":{"@id":"https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve#term"},"audience":{"@type":"EducationalAudience","educationalRole":"student"},"dateModified":"2026-06-29T17:37:04.349Z","isPartOf":{"@type":"Collection","name":"Principles of Microeconomics Key Terms","url":"https://fiveable.me/principles-microeconomics/key-terms"},"publisher":{"@type":"Organization","name":"Fiveable","url":"https://fiveable.me"}},{"@type":"DefinedTerm","@id":"https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve#term","name":"Average Variable Cost (AVC) Curve","description":"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.","url":"https://fiveable.me/principles-microeconomics/key-terms/average-variable-cost-avc-curve","inDefinedTermSet":{"@type":"DefinedTermSet","name":"Principles of Microeconomics Key Terms","url":"https://fiveable.me/principles-microeconomics/key-terms"}},{"@type":"FAQPage","mainEntity":[{"@type":"Question","name":"What is the Average Variable Cost (AVC) curve?","acceptedAnswer":{"@type":"Answer","text":"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."}},{"@type":"Question","name":"Does the marginal cost curve always cross AVC at its minimum?","acceptedAnswer":{"@type":"Answer","text":"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."}},{"@type":"Question","name":"How is the AVC curve different from the ATC curve?","acceptedAnswer":{"@type":"Answer","text":"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."}},{"@type":"Question","name":"Why is the AVC curve U-shaped?","acceptedAnswer":{"@type":"Answer","text":"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."}},{"@type":"Question","name":"When should a firm shut down based on AVC?","acceptedAnswer":{"@type":"Answer","text":"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."}}]},{"@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Principles of Microeconomics","item":"https://fiveable.me/principles-microeconomics"},{"@type":"ListItem","position":2,"name":"Key Terms","item":"https://fiveable.me/principles-microeconomics/key-terms"},{"@type":"ListItem","position":3,"name":"Unit 7","item":"https://fiveable.me/principles-microeconomics/unit-7"},{"@type":"ListItem","position":4,"name":"Average Variable Cost (AVC) Curve"}]}]} ```