Average variable cost is how much, on average, it costs to make each thing when you count only the costs that change based on how many you make—like materials and worker wages. If a lemonade stand spends $30 on lemons, sugar, and workers to make 20 cups, then the average variable cost is $1.50 per cup.
What’s on This Page?
This page has a calculator to help find average variable cost, easy formulas, step-by-step instructions, examples, and questions and answers to help you understand average variable cost.
Calculator
AVC Formula
Average Variable Costs (AVC) = Total Variable Costs (VC) ÷ Quantity (Q)
Where:
- AVC is how much it costs, on average, to make each item when counting only changing costs.
- VC is the total of the changing costs
- Q is how many things you made
How to Calculate Average Variable Cost – Step by Step
Step 1 – Find the total variable costs (TVC). This is all the costs that change when you make more or fewer items, like ingredients and hourly wages.
Step 2 – Find the quantity of units produced (Q). This could be cups of lemonade, toys, or anything you produce.
Step 3 – Calculate the average variable cost (AVC). Divide the total variable costs by the number of things made to get the average variable cost.
Example
A coffee shop spends $10,000 on coffee beans, $5,000 on milk and sugar, and $15,000 on hourly workers to make 20,000 cups of coffee in a month.
Step 1: Add up the variable costs: $10,000 + $5,000 + $15,000 = $30,000
Step 2: Number of cups made (Q) = 20,000
Step 3: Calculate Average Variable Cost (AVC): $30,000 ÷ 20,000 = $1.5
Result: The average variable cost is $1.50 per cup. This means, on average, it costs $1.50 in variable expenses to make each cup of coffee.
What is Average Variable Cost (AVC)?
Average variable cost (AVC) is how much it costs, on average, to make each item when counting only the costs that change with how much you make, like materials, energy, and hourly wages.
Variable Costs vs. Average Variable Cost
Variable cost is the total of all costs that change.
Average variable cost is how much, on average, each item costs when counting only these changing costs.
Average Fixed Cost vs. Average Variable Cost
Average fixed cost (AFC) is the cost of things that don’t change, like rent, spread over each item.
Average variable cost (AVC) is only the cost of things that do change with how much you make, like ingredients and wages.
Average Cost vs. Average Variable Cost
Average cost (AC) includes both fixed and variable costs and shows how much each item costs on average.
Average variable cost (AVC) only counts the costs that change with production.
Marginal Cost vs. Average Variable Cost
Marginal cost (MC) is the cost of making one more item.
Average variable cost (AVC) is the average of all the variable costs for the items you’ve made.
Average Variable Cost Tables
Assuming total variable costs of $100,000
| Units Produced | Average Variable Cost |
| 1 | $100,000 |
| 10 | $10,000 |
| 100 | $1,000 |
| 1,000 | $100 |
| 5,000 | $20 |
| 10,000 | $10 |
| 50,000 | $2 |
| 100,000 | $1 |
| 500,000 | $0.20 |
| 1,000,000 | $0.10 |
Assuming Total Variable costs of $500,000
| Units Produced | Average Variable Cost |
| 1 | $500,000 |
| 10 | $50,000 |
| 100 | $5,000 |
| 1,000 | $500 |
| 5,000 | $100 |
| 10,000 | $50 |
| 50,000 | $10 |
| 100,000 | $5 |
| 500,000 | $1 |
| 1,000,000 | $0.50 |
FAQs
Q: How does average variable cost change with output?
A: It might go down at first because of efficiency but could go up if production gets too high and resources become strained.
Q: Can average variable cost be lower than marginal cost?
A: Yes, when making one more item (marginal cost) is more expensive than the current average.
Q: Is labour and salaries a fixed or variable cost?
A: It can be both! Fixed if it’s a salary that doesn’t change, and variable if it’s hourly pay that changes with production.
Sources and more resources
- Wikipedia contributors. (2023b, November 1). Average variable cost. Wikipedia. https://en.wikipedia.org/wiki/Average_variable_cost
- Kacapyr, E., & Redelsheimer, J., & Musgrave, F. Barron’s AP Microeconomics / Macroeconomics (6th ed.). (2018). United States of America: Barron’s. ISBN: 978-1-4380-1065-6. Page 94.
- Pindyck, R., & Rubinfeld, D., Microeconomics (8th ed.), (2013). United States of America: Pearson. ISBN 13: 978-0-13-285712-3. Page 237.
- Nicholson, W., & Snyder, C. Microeconomic Theory – Basic Principles and Extensions (10th ed.). (2008). United States of America: Thomas South-Western. ISBN 13: 978-0-324-42162-0. Page 331.
- Greenlaw, S., & Shapiro, D., Principles of Microeconomics 2e. (2018). Houston: Rice University OpenStax. ISBN 13: 978-1-947172-35-7. Page 168.
- Marginal cost, average variable cost, and average total cost. (n.d.). Khan Academy. Retrieved September 23, 2024, from https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/production-cost-and-the-perfect-competition-model-temporary/short-run-production-costs/v/marginal-cost-average-variable-cost-and-average-total-cost
- ReviewEcon.com. (2023, September 19). What do I need to know about cost curves? – ReviewEcon.com. https://www.reviewecon.com/what-do-i-need-to-know-about-cost-curves
- Jacob Clifford. (2014, October 3). Short-Run Cost Curves (Part 2)- Micro Topic 3.2 [Video]. YouTube. https://www.youtube.com/watch?v=qYKJdooEnwU