Economics Short Run Vs Long Run Costs Questions Long
Average variable cost (AVC) is a measure of the cost per unit of output that a firm incurs in the short run. It is calculated by dividing the total variable cost (TVC) by the quantity of output produced. AVC represents the additional cost incurred by the firm to produce one more unit of output.
The relationship between average variable cost and marginal cost (MC) is closely linked. Marginal cost refers to the change in total cost resulting from producing one additional unit of output. It is calculated by taking the derivative of the total cost function with respect to the quantity of output.
The relationship between AVC and MC can be explained by understanding the behavior of these cost measures. In the short run, a firm's variable costs are typically characterized by diminishing marginal returns. This means that as the firm increases its output, the additional units of output become more expensive to produce.
When marginal cost is below average variable cost, it pulls the average variable cost down. This is because the additional unit of output is cheaper to produce than the average cost of all units produced so far. As a result, the average variable cost decreases.
Conversely, when marginal cost is above average variable cost, it pushes the average variable cost up. This is because the additional unit of output is more expensive to produce than the average cost of all units produced so far. As a result, the average variable cost increases.
The relationship between AVC and MC can be visualized using their respective cost curves. The AVC curve is U-shaped, reflecting the diminishing marginal returns. The MC curve intersects the AVC curve at its lowest point, which is also the minimum point of the AVC curve. This is because when MC is equal to AVC, the AVC curve reaches its minimum value.
In summary, average variable cost represents the cost per unit of output in the short run, while marginal cost measures the change in total cost resulting from producing one additional unit of output. The relationship between AVC and MC is such that when MC is below AVC, it pulls the average variable cost down, and when MC is above AVC, it pushes the average variable cost up. The minimum point of the AVC curve corresponds to the intersection with the MC curve.