Marginal Cost and Average Cost curves


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Average Total Cost is the sum of average variable cost and average fixed cost. or we can say, average cost is equal to the total cost divided by the number of units produced.
ATC = TC/Q
Marginal Cost is the addition made to the total cost by producing 1 additional unit of output.
Marginal Cost = Total cost of nth unit - Total cost of (n-1)th unit.
MC = TCn – TCn-1 (e.g. – MC of 6 th unit = Total cost of 6th unit – Total cost of 5th unit)
Marginal cost can also be defined as the change in total cost (∆TC) due to change in quantity produced(∆Q).
MC = ∆TC/∆Q

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Marginal Cost and Average Cost curves

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Suppose, there is a firm and it’s cost and production values can be seen from the following table.

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Quantity of Output
Total Cost
MC = TCn – TCn-1
AC = TC/ Q
0
20
20
-
1
30
10
30
2
38
8
19
3
45
7
15
4
50
5
12.5
5
57
7
11.4
6
68
11
11.3
7
80
12
11.45
8
96
16
12
9
114
18
12.7
10
135
21
13.5
Putting the above table in the form of a graph would give

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Relationship between Marginal Cost and Average Total Cost

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· Whenever marginal cost is less than average total cost, average total cost is falling.
· Whenever marginal cost is greater than average total cost, average total cost is rising.
· The marginal-cost curve crosses the average-total-cost curve at the efficient scale.
§ Efficient scale is the quantity that minimizes average total cost( point S in above diagram)

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Three Important Properties of Cost Curves are
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· Marginal cost eventually rises with the quantity of output.
· The average-total-cost curve is U-shaped.
· The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

18 comments:

abedah said...

WOOhoo, gr8 resource! JACKPOT!

Gagani said...

tnx soo much

himanshu mehrotra said...

great explanation

Anonymous said...

Thanks ..i can understand better now..

Anonymous said...

this is awesome! thank you so much, can tell you how much this helped me

Anonymous said...

Not clear

alistair said...

If my Marginal cost increases consistently by $2 per 1 unit of output, would the slope be a straight ascending line?

Anonymous said...

This is KL

MR. Shah hussain said...

thanks brother

MR. Suddat said...

THIS IS BANGING!

ABHISHEK VERMA said...

Helped me thanks bhai

Anonymous said...

marginal cost is suppose to cross ac curve at point P WELL THERE IS NO POINT P ON THE GRAPH. A point S but no point P so this was not helpful at all

Nazmus Sakib said...

thanks

Moorthi Radhakrishnan said...

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Unknown said...

Nice but given same in the text...

dpn mody said...

When TC is increasing at an increasing rate, why does AC still fall?

Deepak Suwalka said...

It's a nice post about Marginal Cost Function. I like the way you have described it. It's really helpful. Thanks for sharing it.

Drake Frost said...

Genius