Relation of Average Variable Cost and Average Total Cost to
Marginal Cost:
Before we explain, the relation
of average variable cost (AVC) and average total cost (ATC)
to marginal cost (MC), it seems necessary that the various types
of costs and their relationship should be shown in the form of a
table. This is illustrated in the table below:
Schedule:
|
Units of Output |
Total Fixed Cost (TFC)
|
Total Variable Cost
(TVC) |
Average Total Cost (ATC)
|
Average Fixed Cost (AFC)
|
Average Variable Cost (AVC)
|
Marginal Cost (MC)
|
|
($) |
($) |
($) |
($) |
($) |
($) |
| 1 |
30 |
15 |
45 |
30 |
15 |
15 |
| 2 |
30 |
16.9 |
23.4 |
15 |
8.4 |
1.9 |
| 3 |
30 |
18.4 |
16.1 |
10.1 |
6.1 |
1.5 |
| 4 |
30 |
19.4 |
12.3 |
7.5 |
4.8 |
1 |
| 5 |
30 |
20 |
10 |
6 |
4.0 |
0.6 |
| 6 |
30 |
22 |
8.7 |
5 |
3.7 |
2 |
| 7 |
30 |
25 |
7.8 |
4.3 |
3.6 |
3 |
| 8 |
30 |
30 |
7.5 |
3.7 |
3.7 |
5 |
| 9 |
30 |
36 |
7.3 |
3.3 |
4 |
6 |
| 10 |
30 |
43 |
7.3 |
3 |
4.3 |
7 |
| 11 |
30 |
60 |
8.2 |
2.7 |
5.5 |
17 |
| 12 |
30 |
90 |
10 |
2.5 |
7.5 |
30 |
| 13 |
30 |
125 |
11.9 |
2.3 |
9.6 |
35 |
| 14 |
30 |
165 |
13.9 |
2.1 |
11.8 |
40 |
| 15 |
30 |
210 |
16 |
2 |
14.8 |
45 |
| 16 |
30 |
270 |
18.7 |
1.9 |
16.7 |
60 |
From the table, the reader can
understand the relation of various types of costs to each other.
We take, first of all, the relation of average total cost to
marginal cost. As production increases, the average total cost
and the marginal cost both begin to decrease.
The average total cost goes on
decreasing up to the 9th unit and then after 10, it begins to
rise. The marginal cost goes on falling up to 5th unit and then
it begins to increase. So long as the average total cost does
not rise, the marginal cost remains below it. When average total
cost begins to increase, toe marginal cost rises more than the
average total cost.
Summing Up:
(1) When average cost is falling,
the marginal cost is always lower than the average
cost.
(2) When average cost is rising,
marginal cost lies above AC and rises faster than AC.
(3) The marginal cost curve must cut
the average cost curve at the minimum point of AC.
Average
Variable Cost and Marginal Cost:
The relation of average variable
cost and marginal cost is also very clear from the diagram given
below. The AVC goes on falling up to the 7th unit, and then it
steadily moves upwards. On the other hand the marginal cost
falls up to the 5th unit and then rises more rapidly than
average variable cost.
Diagram/Figure:
In the diagram (13.10) AFC, AVC, ATC
and MC curves are shown. Here, units of production are measured
along OX and cost along OY. ATC and AVC both fall in the
beginning, reach a minimum point and then begin to rise. So is
the case with the marginal cost curve. It first falls and then after
rising, sharply crosses through the lowest point of average
variable cost and average total cost and rises.
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