Relationship Between Average and Marginal Cost Curves

The relationship between average cost (AC) and marginal cost (MC) is very important in economics, because it helps to understand how costs change with the quantity of commodities produced.

• Average Cost (AC): It is the total cost divided by the number of units produced. It shows the cost per unit of output. $$AC = \frac{Total Cost}{Quantity}$$
• Marginal Cost (MC): It is the additional cost incurred when producing one more unit of output. $$MC = \frac{Change \ in \ Total \ Cost}{Change \ in \ Quantity}$$

Table 1.4: Short-Run Average Cost and Marginal Cost

Based on Table 1.4, Graph 1.4 has been drawn to illustrate the relationship between short-run average fixed cost, average variable cost, average total cost, and marginal cost curves.

Graph 1.4: Relationship Between Cost Curves

As production increases, the average fixed cost curve continuously declines and moves closer to the axes. There is no apparent relationship between the average fixed cost curve and the marginal cost curve. The average variable cost curve, average total cost curve, and marginal cost curve take the shape of the letter 'U'.

The relationship between the average total cost curve and the marginal cost curve is similar to the relationship between the average variable cost curve and the marginal cost curve.

When the average total cost curve is declining, the marginal cost curve intersects it from below. When the average total cost curve reaches its minimum point, the marginal cost curve crosses it from below, meaning that the average cost and marginal cost are equal at this point. Beyond this minimum point, the average total cost curve starts rising. In this case, the marginal cost curve crosses it from above.

The marginal cost curve reaches its minimum point before the average total cost curve does. The minimum point of the marginal cost curve is positioned to the left and below the minimum point of the average total cost curve. In the graph, the minimum points of the marginal cost and average total cost curves are denoted as M and N, respectively.