What is Average Variable Cost Curve in Modern theory of Costs?
Here, we understand what is average variable cost curve in modern theory different from traditional theory of costs in detail.
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What is Average Variable Cost Curve in Modern theory of Costs?
First, we understand the meaning of variable cost-
Variable cost:- Variable costs are those expenses of production which vary or change directly with the level of output. It means that if output expanded they increase or decrease when output seems reduced. At zero production, there is no variable cost. They are known as 'prime costs'.
Now, we will understand the concept of Average Variable Cost Curve in detail -
Average Variable Cost Curve:
The concept of average variable cost in modern theory is same as traditional theory, but here the average variable cost curve has a saucer type shape in modern theory of cost as shown in below mentioned figure as follows-
Figure - 
As shown in above figure, Average Variable Cost (AVC) curve has a flat stretch over a certain range of output that is (A to B) due to reserve capacity of the firm. It clearly shows that, upto point A, average variable cost falls with the increase in output and beyond point B, it rises with the increase in output.
As we noted in the traditional theory, it is assumed that a firm's choice of the plant is guided by the objective of cost minimisation today. It means, the firm will have no reserve capacity. It will have only excess capacity.
But, according to Modern theory of costs, reserve capacity is planned by the firm and it does not cause any increase in the average variable cost, though in practice, it means that the utilisation of plant will be at an output level closer to point B.
CONTINUE READING
What is Average Variable Cost Curve in Modern theory of Costs?
Traditional theory
What is Variable Cost?
Reserve capacity planned by a firm
Average variable cost curve has a saucer type shape.
Modern theory of Costs - Average Variable Cost Curve.
Kinnari
Tech writer at NewsandStory