Cost and Marginal Cost

3.2 Relation between Average

in the study of product-pricing, detailed explanation of the
In economic analysis, especially
with
mutual between
relation and marginal cost is very essential. Their relation is explained
average
the help of Table 8.
Cost of Production
Table 8. Average Cost and Marginal
AVC AC MC
TVC AFC
Units of TC TFC
)
Output ) )
0 10 10 0
20 10
10 10
20 10 10
8
9 14
2 18 5
28 10
8 11.3
24 3.3
34 10 9.5
7
28 2.5
38 10 8.4
6.4
5 2.0
42 10 32 8
6
6.3
1.7 8
48 10 38 8
1.4
6.6
46 16
56 10 9
7.8
8 1.2
72 10 62 it. Itis
curve will be below
curve is falling, MC average
(1) When AC (AFC) and
hen AC
r aFalls,
l l s , MC is Les than AC: fixed cost
aggregate
of average cost (TV)
cost is the
variable
so in total
ause whereas average
only to change
Variahla
variable cost
AVC),
marginal cost refers
 corresponding to the stretch BF on MC curve, in
MicroetorOtie
Fig. 10 the rate of fall of the variable cost is
MC
faster than that rate of fall of both variable and
fixed cost together. Beyond point F, additional
total variable cost or MC tends to rise, but the
average of both total fixed and total variable
cOst continues to fall till point E on the AC curve
when both AC and MC become equal.
(1.1) Does MC Rise when AC is Decreasing?:
Generally speaking, when AC falls, MC also
falls. But it is not true for every d a UNITS OF OUTPUT
quantity of
output. It can be possible, when AC is Fig. 10
falling, MC is rising. As shown in Fig. 10, up to 0Q level of output both AC and MC
are
falling, but beyond it even when MC is rising, AC continues to fall. The reason of
this
phenomenon lies in the fact that the minimum point of MC (point F) reaches
the minimum point of AC faster than
(point E), because MC tends to decline faster than AC.
(2) When AC Rises, MC is Greater than AC: When
average cost rises, marginal cost too rises,
but rate of increase in
marginal cost is more than that of average cost. This is
the rate at which additional cost tends to again becauSe
rise (owing to the law of
much faster than the rate at which fixed cost diminishing returns) s
and variable cost
element of fixed cost in AC together tend to rise. The
(comprising of fixed as well as variable
costs) acts as a check on the
rate of rise of AC. When slope of the AC and
MC curves is
curve as is shown after
upwards then MC curve is above A
point E in Fig. 10.
(3) MC Cuts AC at its Lowest Point: Marginal cost is
its minimum. In other words, the
equal to average cost when the latter is at
marginal cost curve cuts the
lowest point of average cost curve. In
Table 8 it is shown
average
cost at the
curve
that average cost is minimum, Le.
8at the seventh unit and the marginal cost at the
seventh unit is also 8. In
shown that marginal cost curve is cutting the Fig. 10, its
average cost curve at latter'slowest point E.
may however be noted that minimum pointof
marginal cost occurs earlier than the average
cost. It is evident from Table 8 that marginal cost is
minimum at the fifth unit while the
average cost is minimum at the seventn unit. Why does
this relationship occur? The
reasons are mathematical ratherthan economic and the
MC is less than AC, then it will
explanation is this: So long
draw AC don towards It. But as soon
as MC is
AC, then it will pull the AC curve up. greater than

In short, MC is always to the left of AC and cuts AC at ts lowest point. Thus, the MC curve must
go through the bottom point of the AC curve.