What is the relationship between Average Cost and Marginal Cost ?

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Q. What is the relationship between Average Cost and Marginal Cost ?

Jammu Kashmir JkboseJKBOSE Class 12 Annual Regular Examination (Commerce) 2019Subjective· 4mImportance★★★★★

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Concept understanding — Marginal Cost Average Variable Cost Relationship

Let’s start with something you already know from everyday life.

Imagine you run a small stall selling samosas. You already have the stove, oil, and spices — those are your fixed costs. Every extra samosa you make needs more dough and more oil — those are your variable costs. Now, suppose making 10 samosas costs you ₹100 in variable costs (₹10 per samosa on average). If you make 11 samosas, the extra (marginal) cost might be only ₹8 — maybe because you’re using the hot oil more efficiently. That ₹8 is your marginal cost. Notice something: the average variable cost (AVC) was ₹10, but the marginal cost (MC) is ₹8 — lower. What happens to the average? It gets pulled down. The new AVC for 11 samosas becomes ₹108 ÷ 11 ≈ ₹9.82. So when MC is below AVC, AVC falls. If the 12th samosa costs ₹12 (MC > AVC), the average will rise.

That’s the whole relationship in a nutshell: MC pulls AVC along with it.

The precise meaning

Marginal Cost (MC) is the addition to total variable cost when one more unit is produced. In symbols:

MC_n = TVC_n - TVC_{n-1}

where $TVC$ is total variable cost and $n$ is the number of units.

Average Variable Cost (AVC) is total variable cost divided by output:

AVC = \frac{TVC}{Q}

where $Q$ is the quantity produced.

The relationship between them is a mathematical property of averages and marginals, not just an economic guess. Whenever the marginal (the extra) is less than the average, the average falls. Whenever the marginal is greater than the average, the average rises. The marginal equals the average only at the point where the average stops falling and starts rising — that is, at the minimum point of the AVC curve.

Important

The MC curve intersects the AVC curve at the minimum point of the AVC curve. This is a universal result — it holds for any U-shaped cost curves.

Why it matters

In the NCERT Class 12 Microeconomics textbook (Chapter 3: Production and Costs), this relationship is used to explain the shape of the firm’s supply curve and the shutdown decision. A firm will continue producing in the short run as long as price covers average variable cost. The MC curve above the minimum AVC is the firm’s short-run supply curve.

If you draw the diagram: AVC is U-shaped (falls then rises). MC is also U-shaped but crosses AVC at its lowest point. Before the crossing, MC lies below AVC; after, MC lies above AVC. This is not a coincidence — it’s the same logic as your samosa stall. …

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The MC curve always intersects the AC curve at the minimum point of the AC curve, approaching from below.

Relationship between AC and MC:

AC = TC/Q (cost per unit of output), MC = ΔTC/ΔQ (addition to total cost from producing one more unit).
When MC is less than AC: each additional unit costs less than the existing average, so it pulls the average down — AC falls as output increases.
When MC is greater than AC: each additional unit costs more than the existing average, so it pulls the average up — AC rises as output increases.
When MC equals AC: the additional unit costs exactly the same as the average, so AC is neither rising nor falling — this is the point of minimum AC. …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

CBSE 2024Set MARCH1 mark
$Q. Match the following (Column A item: SMC): A B 11) SMC a) Zero profit 12) Normal Profit b) Non-monetary exchange 13) Domestic service c) ΔTC/ΔQ 14) Money d) Trade in goods and services 15) Balance of payment e) QD = QS f) Medium of Exchange$
›Reveal solutionSolution

SMC matches (c) ΔTC/ΔQ.

…

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CBSE 2023Set ANNUAL1 markMCQ
$Q. Long run average cost always intersect the Long run marginal cost at - (A) On higher point (B) On minimum point (C) Below from higher point (D) Above from mid point$
›Reveal solutionSolution

LRMC cuts LRAC at the minimum point of LRAC, so (B) is correct.

The relationship between marginal and average cost is general: when MC is below AC it pulls AC down, when MC is above AC it pushes AC up, so MC must cross AC exactly where AC stops falling and starts rising — its *minimum point …

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A	B
11) SMC	a) Zero profit
12) Normal Profit	b) Non-monetary exchange
13) Domestic service	c) ΔTC/ΔQ
14) Money	d) Trade in goods and services
15) Balance of payment	e) QD = QS
	f) Medium of Exchange

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Q.What is the relationship between Average Cost and Marginal Cost ?

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