Average Variable Cost vs Marginal Cost
Average Variable Cost and Marginal Cost are two Production & Costs concepts in AP Economics that students often mix up. Average Variable Cost is the variable cost per unit of output produced. Marginal Cost is the additional cost incurred by producing one more unit of output. Here is how they compare side by side.
It is calculated by dividing total variable cost by quantity of output. Average variable cost typically declines at first due to increasing efficiency, then rises due to diminishing marginal returns.
It is calculated as the change in total cost divided by the change in quantity. Marginal cost typically decreases at first due to increasing marginal returns, then rises due to diminishing returns.
Average Variable Cost vs Marginal Cost: An Average and the Number That Pulls It
| Average Variable Cost (AVC) | Marginal Cost (MC) | |
|---|---|---|
| Question it answers | What does a unit cost on average in variable inputs | What does the next single unit add to total cost |
| Formula | AVC = VC divided by Q | MC = change in TC divided by change in Q |
| Where the minimum sits | At a higher output, after MC has already turned up | At a lower output, reached first |
| How the two meet | Is cut from below at its lowest point | Passes up through the AVC minimum and keeps rising |
| Direction of pull | Falls while MC lies below it and rises while MC lies above it | Moves with productivity, regardless of where AVC sits |
| Use in the firm's decisions | Compared with price to decide whether to operate at all | Compared with marginal revenue to choose how much to produce |
Check the crossing point in a table before you trust it on a graph
Set the fixed bill at 60 dollars and let variable cost run 44, 72, 102, 136, 180 and 240 dollars for one through six units. Total cost is therefore 104, 132, 162, 196, 240 and 300 dollars, and marginal cost, the difference between consecutive totals, reads 44, 28, 30, 34, 44 and 60 dollars. Average variable cost is the variable bill divided by output: 44, 36, 34, 34, 36 and 40 dollars. Follow the columns together. The second unit adds 28 dollars against a running average of 44, and the average falls to 36. The third adds 30 dollars, still under the 36 dollar average, so the average falls again to 34. The fourth adds exactly 34 dollars, the average holds at 34, and that equality is the crossing point. The fifth adds 44 dollars, far above the average, and AVC turns up to 36. Notice the ordering. Marginal cost reached its own low of 28 dollars at two units and was already climbing again, while average variable cost was still falling and did not reach its floor of 34 dollars until three. An average is always slower to turn than the number pulling it. See /glossary/marginal-average-rule for the general statement. The figures are illustrative.
Marginal cost is the slope of the cost curve, not a point on it
Average variable cost is a height: pick a quantity, read the variable bill, divide, and you have a dollar figure that belongs to that quantity. Marginal cost is a slope: it belongs to the gap between two quantities and answers what changed. That difference explains why fixed costs vanish from marginal cost entirely. Total cost and variable cost differ by a constant at every output, so the two curves have identical slopes, and the change in total cost from one unit to the next is the change in variable cost. Raise the rent and every AVC figure stays put while every ATC figure rises, yet the whole MC column is untouched. The practical consequence shows up in exam questions about a lump sum tax or a licensing fee: neither shifts marginal cost, so neither changes the profit maximizing quantity of a firm that stays open. A per unit tax is a different animal, because it adds to the cost of each additional unit and pushes MC up. You can work through the differencing on your own table at /calculate/marginal-cost.
Frequently asked questions
What is the difference between average variable cost and marginal cost?
Average variable cost spreads all variable spending over every unit produced, while marginal cost reports the extra spending caused by one more unit alone. The first describes the whole batch made so far and the second describes only the next one out the door.
Why does marginal cost cross average variable cost at its minimum?
Because any average falls while the incoming value is below it and rises while the incoming value is above it, so the average can only stop falling at the moment the two are equal. That equality point is the AVC minimum, and marginal cost is rising as it passes through.
Does marginal cost include fixed cost?
No, fixed cost drops out of marginal cost because it does not change when one more unit is produced. Adding a larger fixed bill lifts total cost and average total cost at every quantity while leaving the marginal cost column exactly as it was.
Live Production Costs graph. Drag the curves, or open the full version.
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