Average variable Cost

Variable cost spent on single unit on goods is called Average variable Cost. By dividing the total variable cost with number of units of production we get Average Variable Cost.

Variable cost (raw material & electricity) per single unit is called as average variable cost, will come down when production is raised due to economies of scale [Total production cost comes down when larger quantities are produced]. Thereafter certain limit again the cost per unit will raise as the variable cost increases after the optimum level of output. The reason behind this situation is as follows.

In general, larger quantities of raw material is purchased to increase the production level, therefore the supplier of raw material may charges less price as larger quantiles of raw material is purchased. But in the case of the power / electricity charges which is one of the variable cost is based on the slab rates system which will increase with the consumption of power. Therefore when production is raised automatically the power consumption is also increased which will lead to increase in the over all cost of the production. When these two variable cost such as power and raw material combines together, cost will be coming down to certain limit thereafter the cost raises gradually.

Per unit variable cost on production is called Average Variable Cost.

Average Variable Cost Schedule Table

If you observe the average variable cost schedule table, one can easily understand concept of average variable cost and what is average variable cost in the economics.

When there are zero units produced, average variable cost is nil and does not exist, as average variable cost cannot be calculated when there is no production. When the production is started with 1000 units, average variable cost incurred is 1.00/- per unit and when the production is raised to 3000 units, the average variable cost came down to 0.87/- per unit, as the average variable cost always come down when there is raise in the production, due to economies of scale of production. But the the average variable cost again raised to 1.00/- per unit at 5000 units of production. Hence here the optimum level of output is at 3000 units as the average variable cost is 0.87/- which is lowest.

Average Variable Cost Graph

The above average variable cost Schedule is presented in below graphical form so as as to understand easily about this concept. The Average variable Cost curve in the graph is 'U' shaped , as the average variable cost decrease with the raise in the output for certain limit, after that the average variable cost again starts increasing with further raise in the output. Hence average variable cost concept says that optimum level of output is always beneficial for producer to reduce overall cost of production.