Derive the relationship between marginal cost and average variable

The Relation between the Average and Marginal Cost Curve

derive the relationship between marginal cost and average variable

In economics, marginal cost represents the total cost to produce one additional unit of What is the relationship between marginal and average product?. For example, average cost (AC), also called average total cost, is the total cost Relationship Between Marginal and Average Variable Costs. Understanding the Relationship between Marginal Cost and Average Variable Cost. Review: Marginal cost (MC) is the cost of producing an extra unit of output.

It is derived by calculating change in total cost divided by change in quantity of output. Visually, the marginal cost curve is concave up because initially marginal costs fall to a point and then rise again.

derive the relationship between marginal cost and average variable

As an example, a bottled water producer creates cases of bottled water. With each successive case, the producer evaluates changes in total cost.

4.6 The Relationship Between Average Total Cost and Marginal Cost

This gives the producer a curve of the costs for the next case, or marginal case, of water. Initially, costs will fall as efficient levels are reached. However, costs of aquiring additional water, more bottles, and additional labor tend to rise as quantity produced rises: Average Variable Cost Curve Average variable cost gives a representation of the average cost at a specific production level by comparing two entries, variable cost divided by quantity.

derive the relationship between marginal cost and average variable

The average variable cost curve is a representation of costs at specific quantities. Visually, the average variable cost curve is concave up but starts higher and is much flatter than the marginal cost curve.

What is the Relationship between Average Cost and Marginal Cost?

Continuing our example, lets assume that labor is our only variable cost and evaluate it at increasing production levels.

Initially, labor can produce cases more efficiently.

derive the relationship between marginal cost and average variable

However, as production increases, labor will pass an efficient point and slow down or more labor will be needed. The relationship between average and marginal cost can be easily remembered with the help of Fig.

derive the relationship between marginal cost and average variable

It is illustrated in this figure that when marginal cost MC is above average cost ACthe 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 ACthe average cost remains the same, that is, the marginal cost pulls the average cost horizontally. 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.

  • The Relation between the Average and Marginal Cost Curve
  • Can the Marginal Cost Curve & the Average Variable Cost Curve Be the Same?

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. As a result, the average cost is falling.

What is the Relationship between Average Cost and Marginal Cost?

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.

derive the relationship between marginal cost and average variable