Relationship between AC and AVC and between AC and MC
Both marginal cost (MC) and average cost (AC) are derived from the total cost. They bear unique relationship. The relationship between MC and AC can be. Here are explanations of the relationship between average and marginal costs For example, average cost (AC), also called average total cost, is the total marginal cost (MC) is the incremental cost of the last unit produced. Let us learn about the relationship between Ac and AVC and between AC and MC. First, AC = AFC + AVC. Second, AC = TC/Q. ADVERTISEMENTS.
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. Likewise, when average cost is rising, we cannot deduce that marginal cost will be rising too.
When average cost is rising, the marginal cost must be above it but the marginal cost itself may be either rising or falling.
Relationship between Marginal Cost (MC) and Average Cost (AC) - Free BCom Notes
As a result, the average cost is falling. But beyond point K and up to point L marginal cost curve lies below the average cost curve with the result that the average cost curve is falling.
But it will seen that between K and L where the marginal cost is rising, the average cost is falling. It is therefore clear that when the average cost 4 is falling, marginal cost may be falling or rising. This can also be easily illustrated by the example of batting average.
If in his next innings he scores less than 50, say 45, his batting average will fall. But his marginal score of 45, though less than the average score may itself have risen.
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For instance, he might have scored 40 in his previous innings so that his present marginal score of 45 is greater than his previous marginal score.
Thus one cannot deduce about marginal cost as to whether it will be falling or rising when average cost is falling or rising. 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.
When marginal cost is equal to average cost, it is the minimum point of the latter.
It is important to note that as long as the marginal cost is less than average cost, each additional unit of output will add less to total cost in comparison to the average per unit cost incurred on the previous units.
This lowers the overall average cost of production.
Relationship between Marginal Cost (MC) and Average Cost (AC)
Hence, the average cost will continue to decline as long as the marginal cost is less-than the average cost whether the marginal cost is itself rising or falling. Further, when the marginal cost exceeds the average cost, each extra unit of output produced adds more to the total cost than the average cost incurred on the previous units, resulting in rise in the overall average cost of production.
This leads to a rise in the average cost curve, when the marginal cost is more than the average cost.