Relationship between marginal and average cost
Also called: MC-AC relationship · Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
Marginal cost (MC) is the extra cost of one more unit. Average cost (AC) is the cost per unit. When MC is below AC, it pulls AC down. When MC is above AC, it pushes AC up. When MC equals AC, AC is at its lowest point. So the MC curve cuts the AC curve from below, at AC's minimum. This holds for:
- SMC with AVC and SAC in the short run;
- LRMC with LRAC in the long run.
AC can be falling even while MC is already rising. The rule is about whether MC is above or below AC, not about which way MC is moving.
Example
Your average marks rise only if your next test score is above your current average. In NCERT Table 3.3, SMC at 7 units is ₹8, which is below SAC of ₹9.83 at 6 units, so SAC falls to ₹9.57. At 8 units, SMC is ₹13, which is above ₹9.57, so SAC rises to ₹10.
Don't confuse with
- MP–AP relationship: marginal product cuts average product from above, at the maximum of AP. On the cost side, MC cuts AC from below, at the minimum of AC.