The Average Variable Cost Curve

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The average variable cost (AVC) in the short run and long run is ‘U’ shaped.

Average variable cost is the total variable cost per unit of output, found by dividing total variable cost by the quantity of output. Thus if a firm produces X2 units of a commodity at a total variable cost of TVx2 the AVC of producing these two units of output is given as

Average variable cost decreases with additional production at relatively small quantities of output and then eventually increases with relatively larger quantities of output. This pattern is illustrated by a U-shaped average variable cost curve. Average variable cost curve is a curve that graphically represents the relation between average variable cost incurred by a firm in the short-run production of a good or service and the quantity produced. This curve is constructed to capture the relation between average variable cost and the level of output, holding other variables, like technology and resource prices, constant. The AVC curve is ‘U’ shaped because the falling portion of the AVC curve reflects an improvement in the use of available resources due to specialization and division of labour however the rising portion of the AVC curve is a result of the law states that as continuous amounts of a variable factor of production is combined with a given amount of another fixed factor of production. Eventually the marginal productivity and the average productivity of the firm will fall. The falling productivity of factors corresponds to arising variable cost. This graph is the average variable cost curve for the short-run production of bracelets. The quantity of bracelets production, measured on the horizontal axis, ranges from 0 to 10 and the average variable cost incurred in the production of bracelets, measured on the vertical axis, ranges from a high of $5 to a low of $2.50, before rising again.

As noted above, the average variable cost curve is U-shaped. For the first 6 bracelets,...
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