Relation between Average, Marginal and Total Cost | Production | Microeconomics
Video explaining The Relationship Between Average Cost and Marginal Cost for Microeconomics. This is one of many videos provided by Clutch Prep to. Calculating total cost: This graphs shows the relationship between fixed cost and variable cost. The sum of Relationship Between Average and Marginal Cost. The marginal cost curve bears relationship to the average cost curve. It is very important to have a clear idea about this relationship as it plays an important role .
However, it is not necessary that MC should fall throughout this stage. Actually, MC rises earlier than AC.
What is the Relationship between Average Cost and Marginal Cost?
Here, MC stands equal to AC, i. It brief, it can be said that MC intersects AC at its minimum point.
Both are U-shaped curves on account of the operation of the law of variable proportions. When MC rises above AC, it pulls the latter upwards.
Here, the ray from the origin is also tangent to the corresponding point of total variable cost curve. It shows that so long as the marginal cost curve lies below the average cost curve, the average cost falls pulled downwards by the marginal cost. On the other hand, when marginal cost lies above the average cost curve, the average cost rises pulled upwards by the marginal cost.
What is the Relationship between Average Cost and Marginal Cost? - Explained!
When marginal cost is equal to average cost, it is the minimum point of the latter. If instead of 45, he scores more than 50, say 55, in his next innings, then his average score will increase because now the marginal score is greater than his previous average score. Again, with his present average runs of 50, if he scores 50 also in his next innings, then his average score will remain the same because now the marginal score is just equal to the average score.
Likewise, suppose a producer is producing a certain number of units of a product and his average cost is Rs. Now, if he produces one unit more and his average cost falls, it means that the additional unit must have cost him less than Rs. On the other hand, if the production of the additional unit raises his average cast, then the marginal unit must have cost him more than Rs.
And finally, if as a result of production of an additional unit, the average cost remains the same, then marginal unit must have cost him exactly Rs. The relationship between average and marginal cost can be easily remembered with the help of Fig. It is illustrated in this figure that when marginal cost MC is above average cost ACthe average cost rises, that is, the marginal cost MC pulls the average cost AC upwards.
On the other hand, if the marginal cost MC is below the average cost AC ; average cost falls, that is, the marginal cost pulls the average cost downwards. When marginal cost MC stands equal to the average cost ACthe average cost remains the same, that is, the marginal cost pulls the average cost horizontally. As long as short-run marginal cost curve MC lies below short-run average cost curve, the average cost curve AC is falling.
Relationship between Marginal Cost and Average Cost (With Diagram)
When marginal cost curve MC lies above the average cost curve AC, the latter is rising. It is important to note that we cannot generalise about the direction in which marginal cost is moving from the way average cost is changing, that is, when average cost is falling we cannot say that marginal cost will be falling too. When average cost is falling, what we can say definitely is only that the marginal cost will be below it but the marginal cost itself may be either rising or falling.