Explainthe relationship between the average cost and marginal cost curve? Answer:
We usually assume that the Average Cost curve is U shaped
The MC curve will intercept the AC curves at its minimum point. When AC is decreasing, MC lies below AC - because when MC is below AC, producing an extra unit of output will pull down average cots When AC is increasing, MC lies above AC - because when MC is above AC, producing an extra unit of output will raise average costs Therefore MC will intercept the AC curve at its minimum point
The basic average cost and marginal cost of a company are very different concepts, but they work together and fluctuate up and down according to how the other cost grows or declines. Average cost can be described as the ratio of the total cost to the total number of goods sold. It is equal to the total cost of the goods sold divided by the number of items sold. It has a very strong relationship with the supply and demand curves. Average cost can also be described as the sum of the average variable costs and average fixed costs. On the other hand, marginal cost is the cost that has incurred due to an additional unit or product. The average cost and marginal cost are inter-related because when the marginal cost goes up, or down, the average cost will fluctuate as well.
Average cost is different from the actual price because it depends upon the overall relationship between supply and demand. In some situations, price can be lower than the average cost, depending upon the marginal cost. Marginal cost is the variable cost of producing an additional unit. When it is greater than the average cost, then the marginal cost pulls the average upwards. If it is lower than the average cost, then the marginal cost pulls the average cost downward. These are the relationships between these two entities. When average cost and marginal cost are of same value, then the average cost remains constant, without any change.
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