Average Variable Cost
Plain definition
Variable cost divided by the quantity of output (AVC = VC ÷ Q) — the variable cost per unit.
In economics
Average variable cost typically falls at first due to specialization, then rises under diminishing returns, giving it a U-shape. The shutdown rule uses AVC: a firm should stop producing in the short run if price falls below minimum AVC, because then revenue does not even cover the variable costs of staying open.
Example
If flour, labor, and packaging cost 1.20 per loaf.
Common confusion
AVC is often confused with marginal cost. AVC is variable cost per unit across all units; MC is the cost of the next unit. MC crosses AVC at AVC's minimum, and the firm's short-run supply curve is the MC curve above minimum AVC.