Average variable cost
Also called: AVC · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Average variable cost is total variable cost divided by output: AVC = TVC / q. It is the variable cost of one unit on average. Total variable cost is the sum of all marginal costs (MC, the extra cost of one more unit). So AVC is also the average of all marginal costs up to that output. AVC is U-shaped. It falls while marginal cost is below it and rises once marginal cost is above it. Beyond NCERT, AVC = w / AP_L (wage divided by output per worker). So AVC is lowest where output per worker is highest.
Example
In NCERT Table 3.3, AVC is ₹10 at 1 unit and ₹8 at 3 units. It reaches its lowest point of ₹6.5 at 6 units, then rises to ₹9.5 at 10 units.
Don't confuse with
- Short-run average cost (SAC): SAC = AVC + AFC. So SAC is always above AVC by the amount of AFC, and SAC reaches its lowest point at a higher output than AVC does.
Related concepts
- Average fixed cost
- Short run average cost
- Short run marginal cost
- Relationship between marginal and average cost