In Economics, the average variable cost is the variable cost per unit. Average variable cost is determined by dividing the total variable cost by the output.
The firms use the average variable cost to determine when to stop their production in the short term. If the firm receives a good price that is greater than the average variable cost and covers the fixed costs, then the firm continues the production.
In another scenario, where the firm gets a price that is less than the average variable cost, then the firm shuts down the production because it is unable to meet the fixed and variable costs.
The mathematical representation of the average variable cost formula is as follows:
AVC = VC/Q
AVC = Average variable cost
VC = Total variable cost
Q = Output
The average variable cost can also be calculated in terms of average fixed cost and average total cost as follows:
AVC = ATC – AFC
ATC = Average total cost
AFC = Average fixed cost
The average variable cost curve is U-shaped. Though it declines initially, it rises finally.
This article was about the average variable cost formula, which is an important concept to evaluate whether a firm should continue the production or not. To read more about such interesting concepts, stay tuned to BYJU’S.