What is the relation between marginal cost and average total cost?

The Relation between the Average and Marginal Cost Curve!

The relationship between the marginal cost and average cost is the same as that between any other marginal-average quantities. When marginal cost is less than average cost, average cost falls and when marginal cost is greater than average cost, average cost rises.

This marginal-average relationship is a matter of mathematical truism and can be easily understood by a simple example. Suppose that a cricket player’s batting average is 50. If in his next innings he scores less than 50, say 45, then his average score will fall because his marginal (additional) score is less than his average score.

If instead of 45, he scores more than 50, say 55, in his next innings, then his average score will increase because now the marginal score is greater than his previous average score. Again, with his present average runs of 50, if he scores 50 also in his next innings, then his average score will remain the same because now the marginal score is just equal to the average score.

Likewise, suppose a producer is producing a certain number of units of a product and his average cost is Rs. 20. Now, if he produces one unit more and his average cost falls, it means that the additional unit must have cost him less than Rs. 20. On the other hand, if the production of the additional unit raises his average cast, then the marginal unit must have cost him more than Rs. 20.

And finally, if as a result of production of an additional unit, the average cost remains the same, then marginal unit must have cost him exactly Rs. 20, that is, marginal cost and average cost would be equal in this case.

The relationship between average and marginal cost can be easily remembered with the help of Fig. 19.4. It is illustrated in this figure that when marginal cost (MC) is above average cost (AC), the average cost rises, that is, the marginal cost (MC) pulls the average cost (AC) upwards.

On the other hand, if the marginal cost (MC) is below the average cost (AC); average cost falls, that is, the marginal cost pulls the average cost downwards. When marginal cost (MC) stands equal to the average cost (AC), the average cost remains the same, that is, the marginal cost pulls the average cost horizontally.

Now, take Fig. 19.5 where short-run average cost curve AC and marginal cost curve MC are drawn. As long as short-run marginal cost curve MC lies below short-run average cost curve, the average cost curve AC is falling. When marginal cost curve MC lies above the average cost curve AC, the latter is rising.

At the point of intersec­tion L where MC is equal to AC, AC is neither falling nor rising, that is, at point L, AC has just ceased to fall but has not yet begun to rise. It follows that point L, at which the MC curve crosses the AC curve to lie above the AC curve is the minimum point of the AC curve. Thus, marginal cost curve cuts the average cost curve at the latter’s minimum point.

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. Consider Fig. 19.5 where up to the point K, marginal cost is falling as well as below the average cost.

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.

This is because though MC is rising between K and L, it is below AC. 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.

Suppose a cricket player’s present batting average is 50. 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.

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.