# What is Average Variable Cost (AVC)?

Definition: The average variable cost represents the total variable cost per unit, including materials and labor, in short-term production calculated by dividing total variables costs by total output. Hence, a change in the output (Q) causes a change in the variable cost.

## What Does Average Variable Cost Mean?

What is the definition of average variable cost? As a rule of thumb, when the firm’s output is relatively small, the average cost decreases, whereas when the output starts increasing, the average cost increases too. Firms that seek to maximize their profits, use the average cost to determine the point that they should shut down production in the short term.

Therefore, if the price of a good is higher than the AVC of the good, it means that the firm is covering all the variable costs and a percentage of the fixed costs. In this case, firms continue production. On the contrary, if the price they receive for good is lower than the AVC, firms cease production to avoid additional variable costs.

Let’s look at an example.

## Example

Adam works as an accountant in a manufacturing firm, which produces equipment for tractors. He is asked to calculate the average variable cost formula of production so that the management decides whether they should go on or cease production after a given level of output.