Average Variable Cost (AVC) refers to the cost of production that varies with the level of output. It is calculated by dividing the total variable costs by the quantity of goods produced. Variable costs include expenses that change with production volume, such as raw materials and labor. Understanding AVC is important for businesses as it helps in pricing decisions and determining the optimal level of production. When the price of a product is higher than the AVC, a company can cover its variable costs and contribute to fixed costs, leading to profitability.