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SOCIAL SECURITY TAX: A tax on wage earnings that's used to fund the Social Security system. In principle, the Social Security tax is divided equally between employer and employee--your share is listed under the FICA heading of your paycheck. In practice, however, employees really end up paying both employee and employer contributes. The reason is that employers need to consider the entire cost of hiring an employee, including wages, fringe benefits, and assorted taxes. The more they pay in these nonwage items, like Social Security taxes, the less they pay in wages. In that the Social security tax is only on earnings, and excludes profit, interest, and rent, it tends to be a regressive tax.
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AVERAGE VARIABLE COST: Total variable cost per unit of output, found by dividing total variable cost by the quantity of output. When compared with price (per unit revenue), average variable cost (AVC) indicates whether or not a profit-maximizing firm should shut down production in the short run. Average variable cost is one of three average cost concepts important to short-run production analysis. The other two are average total cost and average fixed cost. A related concept is marginal cost. Average variable cost is the total variable cost per unit of output incurred when a firm engages in short-run production. It can be found in two ways. Because average variable cost is total variable cost per unit of output, it can be found by dividing total variable cost by the quantity of output. Alternatively, because total variable cost is the difference between of total cost and total fixed cost, average variable cost can be derived by subtracting average fixed cost from average total cost.In general, average variable cost decreases with additional production at relatively small quantities of output, then eventually increases with relatively large quantities of output. This pattern is illustrated by a U-shaped average variable cost curve. Average variable cost, when combined with price, indicates whether or not a firm should shut down production in the short run. If price is greater than average variable cost, then the firm is able to pay all variable cost and a portion of fixed cost. Even though it might be incurring an economic loss, it will lose less by producing that by shutting down production. If, however, price is less than average variable cost, then the firm is better off shutting down production. Calculating Average Variable CostThe standard method of calculating average variable cost is to divide total variable cost by the quantity, illustrated by this equation:average variable cost | = | total variable cost quantity of output |
An alternative specification for average variable cost is found by subtracting average fixed cost from average total cost:average variable cost = average total cost - average fixed cost |
An alternative equation computes total variable cost from average variable cost:total variable cost = average variable cost x quantity of output |
Stuffed Animal CostAverage Variable Cost |
| Insight into average variable cost can be had using the table to the right, which presents the total variable cost of producing Wacky Willy Stuffed Amigos. The first column is the quantity of Stuffed Amigos rolling off the assembly line, ranging from 0 to 10. The second column is the total variable cost of producing each quantity, ranging from $0 to $43. If 5 Stuffed Amigos are produced, then the total variable cost incurred in their production is $13. The production of 9 Stuffed Amigos, in comparison, incurs a total variable cost of $31.Deriving average variable cost is as simple as dividing the second column of total variable cost values by the first column of output quantity values. The average variable cost of producing 1 Stuffed Amigo is relatively easy--divide $5 by 1 Stuffed Amigo. If the result of this calculation is not readily obvious, click the [One] button. The average variable cost of two Stuffed Amigos might be a little less obvious, but not much. Click the [Two] button to reveal that the average variable cost is $4, which is $8 divided by 2 Stuffed Amigos. A click of the [Three] shows that the average variable cost of producing 3 Stuffed Amigos is $3.33, $10 divided by 3. The remaining average variable cost values can be displayed by clicking the [Remaining] button. With all numbers displayed, what interesting insight into average variable cost can be had? - First, average variable cost is relatively high for the first Stuffed Amigo produced, then declines. However, it reaches a low, then rises with production of the last few Stuffed Amigos. This is the U-shaped pattern noted above.
- Second, average variable cost remains positive, it never reaches a zero value and never turns negative. The only way for negative average variable cost is for negative total variable cost, which makes no theoretical or practical sense.
The Average Variable Cost CurveAverage Variable Cost Curve | | The relation between average variable cost and the quantity of production can be represented by a curve, such as the one conveniently presented in the exhibit to the right.The key feature of this average variable cost is the shape. It is U-shaped, meaning it has a negative slope for small quantities of output, reaches a minimum value, then has a positive slope for larger quantities. This U-shape is indirectly attributable to the law of diminishing marginal returns. The U-shape of the average variable cost curve is indirectly caused by increasing, then decreasing marginal returns (and the law of diminishing marginal returns). The negatively-sloped portion is attributable to increasing marginal returns and the positively-sloped portion is attributable to decreasing marginal returns (and the law of diminishing marginal returns).
Recommended Citation:AVERAGE VARIABLE COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: November 7, 2024]. Check Out These Related Terms... | | | | | | | | | | | | Or For A Little Background... | | | | | | | | | | | | And For Further Study... | | | | | | | | | | | | | | | | | | |
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BLUE PLACIDOLA [What's This?]
Today, you are likely to spend a great deal of time driving to a factory outlet wanting to buy either a birthday greeting card for your father or a T-shirt commemorating the first day of spring. Be on the lookout for neighborhood pets, especially belligerent parrots. Your Complete Scope
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Lombard Street is London's equivalent of New York's Wall Street.
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"If you worried about falling off the bike, you'd never get on. " -- Lance Armstrong, bicycle racer
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