Average Variable Cost
What is Average Variable Cost?
Written by Jason Gordon
Updated at March 16th, 2023
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What is Average Variable Cost?
The cost of producing a firm’s output depends on how much labor and physical capital the firm uses. A list of the costs involved in producing cars will look very different from the costs involved in producing computer software or haircuts or fast-food meals.
We can measure costs in a variety of ways. Each way provides its own insight into costs. Sometimes firms need to look at their cost per unit of output, not just their total cost. There are two ways to measure per unit costs. The most intuitive way is average cost. Average cost is the cost on average of producing a given quantity.
We define average cost as total cost divided by the quantity of output produced. AC = TC / Q If producing two widgets costs a total of $44, the average cost per widget is $44 / 2 = $22 per widget. The other way of measuring cost per unit is marginal cost.