Defining Average Variable Costs ª Average variable cost (avc)

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Defining Average Variable Costs 
ª 
Average variable cost (AVC)
is the variable cost per unit of 
total product (TP)
.
ª To calculate AVC, divide variable cost at a given total product level by that total product. 
This calculation yields the cost per unit of output.
ª AVC tells the firm whether the output level is potentially profitable.
Review: 
Variable cost (VC)
is the wage 
cost required to produce a given level of 
output, or the wages paid times the number of 
workers at each output level.
To calculate 
average variable cost (AVC)
at 
each output level, divide the variable cost at 
that level by the total product. 
You will get an average variable cost for each 
output level.
For example, on the left at five workers, the 
VC of $5000 is divided by the TP of 45 to get 
an AVC of $111.
Examine the chart on the left:
AVC is a guide to show the firm whether a 
certain output level is profitable. If the AVC is 
greater than the price of the product, there 
would be no potential 
profit
.
However, if AVC is lower than the price, the 
firm could make a profit. (Profitability also 
has to do with fixed costs, which are not 
covered here.)
In the example on the left, the market price 
for a TV is $150. If the firm has only variable 
costs, any output level at which AVC<$150 
would be profitable.