UK Accounting Glossary
In economics, average variable cost (AVC) is a firm’s variable costs (labour, electricity, etc.) divided by the quantity of output produced.
The average variable cost (AVC) is the total variable cost per unit of output. This is found by dividing total variable cost (TVC) by total output (Q). Total variable cost(TVC) is all the costs that vary with output, such as materials and labour.
AVC = TVC / Q
AVC is ‘U’ shaped because of the principle of variable Proportions, which explains the three phases of the curve: Increasing returns to the variable factors, which cause average costs to fall, followed by Constant returns, followed by Diminishing returns, which cause costs to rise.
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This glossary post was last updated: 9th August 2019.