More info on the relationship between these three types of costs is found in these two equations: Finally, VC divided by Q is the average variable cost (AVC). FC divided by Q is the average fixed cost (AFC). TC divided by Q is equal to the average total cost (that is, ATC). In order to understand this in terms of the cost per unit, divide each side by the output (Q):
In the above formula, AVC refers to the average variable cost, VC refers to the total variable cost, and Q refers to the output.Īdditionally, for any firm, the short-term total costs (TC) can be classified as either fixed costs (FC) or variable costs (VC).
Tvc tc afc avc atc formula how to#
Here is how to find the average variable cost using the average variable cost formula: And if a firm is selling its goods for lower than the average variable cost, a firm seeking to maximize their profits (as firms typically do) will halt production so as to prevent more variable costs from arising. In other words, this means that the price of a good should be higher than the average variable cost of the good–in this case, the firm is able to afford all of the variable costs as well as a portion of the fixed costs. Specifically, the average variable cost should be lower than the marginal revenue in order for the firm to continue operating profitably over time. Similar Posts: Use of Average Variable Cost for FirmsĪverage variable cost is significant in that it is a crucial factor in a given firm’s choice about whether to continue operating.
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