What is the average variable cost curve

So it is not the cost per unit of all units being produced, but only the next one or next few. Marginal cost can be calculated by taking the change in total cost and dividing it by the change in quantity. For example, as quantity produced increases from 40 to 60 haircuts, total costs rise by — , or The marginal cost curve may fall for the first few units of output but after that are generally upward-sloping, because diminishing marginal returns implies that additional units are more costly to produce.

A small range of increasing marginal returns can be seen in the figure as a dip in the marginal cost curve before it starts rising.

Watch this video to learn how to draw the various cost curves, including total, fixed and variable costs, marginal cost, average total, average variable, and average fixed costs.

The reason why the intersection occurs at this point is built into the economic meaning of marginal and average costs. If the marginal cost of pro duction is below the average total cost for producing previous units, as it is for the points to the left of where MC crosses ATC, then producing one more additional unit will reduce average costs overall—and the ATC curve will be downward-sloping in this zone.

Conversely, if the marginal cost of production for producing an additional unit is above the average total cost for producing the earlier units, as it is for points to the right of where MC crosses ATC, then producing a marginal unit will increase average costs overall—and the ATC curve must be upward-sloping in this zone. The same relationship is true for marginal cost and average variable cost.

The reasoning is the same also. This does not hold for average fixed cost. Do you know why not? If the score on the most recent quiz you take is lower than your average score on previous quizzes, then the marginal quiz pulls down your average. If your score on the most recent quiz is higher than the average on previous quizzes, the marginal quiz pulls up your average.

In this same way, low marginal costs of production first pull down average costs and then higher marginal costs pull them up. The numerical calculations behind average cost, average variable cost, and marginal cost will change from firm to firm. However, the general patterns of these curves, and the relationships and economic intuition behind them, will not change.

Total cost, fixed cost, and variable cost each reflect different aspects of the cost of production over the entire quantity of output being produced. These costs are measured in dollars. In contrast, marginal cost, average cost, and average variable cost are costs per unit. In the previous example, they are measured as cost per haircut. It would be as if the vertical axis measured two different things. Changes in any of the aggregate demand determinants cause the aggregate demand curve to shift.

While a wide variety of specific ceteris paribus factors can cause the aggregate demand curve to shift, it's usually most convenient to group them into the four, broad expenditure categories -- consumption, investment, government purchases, and net exports. The reason is that changes in these expenditures are the direct cause of shifts in the aggregate demand curve.

If any determinant affects aggregate demand it MUST affect one of these four expenditures. 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 average variable cost curve is one of three average curves. The other two are average total cost curve and average fixed cost curve.

A related curve is the marginal cost curve. In a perfectly competitive market, there are many economic participants but none have the power to set the market price for a particular product. The price per unit is completely controlled by the market forces of supply and demand, and each firm in the market must sell their product at this predetermined market price.

Review of the costs incurred when producing and selling products. Fixed costs FC are expenses to that do not vary with the quantity of output produced Q. Examples of fixed costs include rent and annual salaries.

Variable costs VC are expenses which increase with the quantity of output produced Q. Examples of variable costs include hourly and piece-rate wages, and raw materials used in manufacturing. The graph below shows four costs curves for a firm operating in a perfectly competitive market:.

Therefore, the only possible point at which marginal cost equals average variable or average total cost is the minimum point. Break-even Point. In this situation, the firm will break even: it will not be earning any profits, but it will not be losing money either.

The graph below is based on a more complex economic model, but can still be useful for exploring the cost curves of an individual firm. The amount of capital used K directly impacts the productive capacity of the firm and so changes the quantity of output produced at any given cost. The rental price of capital k affects the fixed costs of the firm by adjusting how expensive it is for the firm to operate with their current level of capital investment.