Marginal cost is the change in total cost that arises when the quantity produced changes by one unit. It is the cost of producing one more unit of a good.

Average variable cost is the total variable cost per unit of output incurred when a firm engages in short-run production. It can be found in two ways. Because average variable cost is total variable cost per unit of output, it can be found by dividing total variable cost by the quantity of output. Alternatively, because total variable cost is the difference between of total cost and total fixed cost, average variable cost can be derived by subtracting average fixed cost from average total cost.

At the amount of input for which average variable cost is minimized, marginal cost is equal to average variable cost. At input levels where marginal cost is above average variable cost, the average variable cost is rising (the curve slopes up as more output is produced). At input levels where marginal cost is below average variable cost, average variable cost is falling (the curve slopes down).