Google
Monday 
December 5, 2016 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
Today's Index
Yesterday's Index
207.9

Help us compile the AmosWEB Free Lunch Index. Tell us about your last lunch.

Skipped lunch altogether.
Bought by another.
Ate lunch at home.
Brought lunch from home.
Fast food drive through.
Fast food dine in.
All-you-can eat buffet.
Casual dining with tip.
Fancy upscale with tip.

More About the Index
Happiest day of the year?

Christmas.
First day of class.
Last day of class.
Thanksgiving.
Birthday.
First day of spring.

DISINFLATION: A decline in the inflation rate. With disinflation, prices are still rising, they're just not rising as fast. Numerically speaking, if the inflation rate was 10% last year, 6% this year, and looks to be 4% next year, then we have disinflation. Disinflation, a reduction in the inflation rate, is not the same as deflation, a decline in the price level. Prices continue to rise with disinflation, just not as fast. Should disinflation continue, presumably because anti-inflationary monetary or fiscal policies are working effectively, then the average price level could decline and we make the transition to deflation.

Visit the GLOSS*arama


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 Cost

The 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 Cost

Average Variable Cost
Average 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 Curve

Average Variable Cost Curve
Average 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).

<= AVERAGE TOTAL COST CURVEAVERAGE VARIABLE COST CURVE =>


Recommended Citation:

AVERAGE VARIABLE COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2016. [Accessed: December 5, 2016].


Check Out These Related Terms...

     | average cost | average variable cost curve | average total cost | average fixed cost | average total cost curve | average fixed cost curve | total variable cost | total variable cost curve | variable cost | fixed cost | marginal cost |


Or For A Little Background...

     | opportunity cost | production | production cost | business | factors of production | microeconomics | short-run production analysis | law of diminishing marginal returns | marginal returns | marginal analysis | average product |


And For Further Study...

     | total cost | total cost curve | total fixed cost | total fixed cost curve | total variable cost and marginal cost | total variable cost curves | total variable cost and total product | legal business organizations | firm objectives | opportunity cost, production possibilities | profit | economic profit | accounting profit | normal profit | accounting cost | profit maximization | long-run average cost | U-shaped cost curves |


Search Again?

Back to the WEB*pedia


APLS

State of the ECONOMY

U 3 Unemployment
November 2015
5.0% No Change
Bureau of Labor Statistics

More Stats

BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time strolling through a department store hoping to buy either decorative garden figurines or a wall poster commemorating last Friday (you know why). Be on the lookout for high interest rates.
Your Complete Scope

This isn't me! What am I?

The 1909 Lincoln penny was the first U.S. coin with the likeness of a U.S. President.
"Every man must decide whether he will walk in the light of creative altruism or in the darkness of destructive selfishness."

-- Martin Luther King, Jr., clergyman

LSE
London Stock Exchange
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2016 AmosWEB*LLC
Send comments or questions to: WebMaster