Legal Definitions - average variable cost

Definition: Average variable cost is the cost per unit of output, which is calculated by dividing the total cost (fixed cost and variable cost) by the output. It is the cost that varies with the level of production.

Example: Let's say a company produces 100 units of a product. The total cost of production is $1000, which includes $500 of fixed cost and $500 of variable cost. The average variable cost would be $5 per unit, which is calculated by dividing the variable cost ($500) by the output (100 units).

Explanation: The example illustrates that the average variable cost is the cost that varies with the level of production. In this case, the variable cost is $5 per unit, which means that the company has to spend $5 for each unit produced. As the level of production increases, the variable cost per unit may decrease due to economies of scale.