In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, average variable cost (AVC) is a firm's
variable cost
Variable costs are costs that change as the quantity of the good or service that a business produces changes.Garrison, Noreen, Brewer. Ch 2 - Managerial Accounting and Costs Concepts, pp 48 Variable costs are the sum of marginal costs over all u ...
s (VC; labour, electricity, etc.) divided by the quantity of
output
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the valu ...
produced (Q):
Average variable cost plus
average fixed cost equals
average total cost (ATC):
A firm would choose to
shut down if the price of its output is below average variable cost at the profit-maximizing level of output (or, more generally if it sells at multiple prices, its
average revenue is less than AVC). Producing anything would not generate revenue significant enough to offset the associated variable costs; producing some output would add losses (additional costs in excess of revenues) to the costs inevitably being incurred (the
fixed costs). By not producing, the firm loses only the fixed costs.
As a result, the firm's short-run
supply curve
In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, ...
has output of 0 when the price is below the minimum AVC and jumps to output such that
for higher prices, where
denotes marginal cost.
[Mankiw, N. Gregory (2001) ''Principles of Microeconomics'', 2e, ch 14, p. 298.]
See also
*
Variable cost
Variable costs are costs that change as the quantity of the good or service that a business produces changes.Garrison, Noreen, Brewer. Ch 2 - Managerial Accounting and Costs Concepts, pp 48 Variable costs are the sum of marginal costs over all u ...
*
Fixed cost
*
Cost curve
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible ...
References
Costs
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