Relationship Between AC, AVC, AFC and MC

The short-run cost curves are not independent of each other — their behaviour is tightly linked, and this linkage is a favourite exam topic.

MC and AC. So long as MC is less than AC, each additional unit costs less than the existing average, so it pulls the average down — AC is falling. Once MC rises above AC, each additional unit costs more than the existing average, so it pulls the average up — AC is rising. It follows that MC must equal AC exactly at the output where AC is at its minimum — the MC curve cuts the AC curve from below, precisely at AC's lowest point.

MC and AVC. The identical logic applies between MC and AVC, since MC is calculated from the same variable-cost changes that build up AVC: MC cuts AVC from below at AVC's minimum point.

AC, AVC and AFC. Because $AC = AVC + AFC$, the vertical gap between the AC curve and the AVC curve at any output is exactly AFC at that output. Since AFC keeps falling as output rises (60, 30, 20, 15, 12, 10, 8.57 in the schedule above), this gap keeps narrowing — the AC and AVC curves draw closer together as output increases, though they never actually meet, since AFC never reaches zero. …