Q.What do you understand by Average Cost (AC) and Marginal Cost (MC)? Explain the mutual relation between these curves.
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Start your 14-day free trial to unlock the full solution →AC is cost per unit and MC is the cost of the last unit; MC pulls AC down when below it, up when above it, and cuts AC at its minimum. Both curves are U-shaped.
Average Cost (AC):
Average Cost is the total cost of production per unit of output: AC = Total Cost ÷ Output (TC/Q). It is also the sum of average fixed cost and average variable cost (AC = AFC + AVC). The AC curve is U-shaped — it first falls, reaches a minimum, and then rises, because of the law of variable proportions.
Marginal Cost (MC):
Marginal Cost is the addition to total cost when output is increased by one unit: MC = TC of n units − TC of (n−1) units. Since fixed cost does not change with output, MC is actually the addition to total variable cost. The MC curve is also U-shaped.
Relationship between AC and MC:
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When MC is less than AC, AC is falling. The additional (marginal) unit costs less than the current average, so it pulls the average down.
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When MC is greater than AC, AC is rising. The additional unit costs more than the current average, so it pulls the average up.
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When MC is equal to AC, AC is at its minimum point. Therefore the MC curve intersects (cuts) the AC curve from below exactly at the lowest point of the AC curve.
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