Relation between average cost and marginal cost, Managerial Economics

Assignment Help:

Q. Relation between average cost and marginal cost?

Relationship between MC and AC are the following:

  • If MC is below AC then AC should be falling. This is because, if MC is below AC then last unit produced costs less than AC of all the earlier units produced. If last unit costs less than earlier ones, then new AC should be less than old AC. So AC should be falling.
  • If MC is above AC then cost of the last unit produced will be higher than AC of the earlier units. Henceforth the new AC should be higher than old AC. So when MC is above AC, AC should be rising.
  • If MC is equal to AC, last unit costs exactly the same as AC of all earlier units. Therefore the new AC is equal to old AC. So the AC curve is flat when AC equals MC. Above mentioned relationship between MC and AC can be seen clearly with the help of figure below.

1199_Relation between average cost and marginal cost.png

Figure: Relation between AC and MC

To the left of lowest point of the AC curve, MC is below AC so AC curve is falling. Even if MC is rising, AC would continue to fall as long as rising MC is less than AC. To the right of minimum point of the AC curve, MC is above AC so AC curve is rising. At the point where MC equals AC, AC curve is flat. Therefore the rising MC curve cuts AC curve at its lowest point.

Relationship between MC and AC can be easily understood by an illustration of a cricket player's batting averages. Let's presume that a cricket player's batting average is 40.

If in his next innings, he scores less than 40, let's suppose 30, then his average score would fall since his marginal score is less than his average score. In its place, if he scores more than 40, say 50, in his following innings, then his average score would increase since his marginal score is greater than his previous average score. Conversely, supposing the average score is 40, if batsman scores 40 in his subsequent innings then his average score would remain the same and his average and marginal scores will be equal.


Related Discussions:- Relation between average cost and marginal cost

Unemployment rate to the desired level, Suppose that the present level of i...

Suppose that the present level of income in the economy is $700 billion. It is determined that in order to decrease the unemployment rate to the desired level, it will be essential

Circular flow of income, Explain a circular flow of income in a frugal econ...

Explain a circular flow of income in a frugal econmomy with diagram

Cost concepts, Ask question #MinimumElectron Control, Inc., sells voltage r...

Ask question #MinimumElectron Control, Inc., sells voltage regulators to other manufacturers, who then customize and distribute the products to quality assurance labs for their sen

Weighted-average costing - normal and abnormal spoilage, Weighted-average c...

Weighted-average costing: Normal and abnormal spoilage Ranka Company manufactures high-quality leather products. The Company's profits hav declined during the past 9 months. R

Resource allocation in a free enterprise, Resource allocation in a free ent...

Resource allocation in a free enterprise Although there are no central committees organising the allocation of resources, there is supposed to be no chaos but order. The major

Core contribution of the behavioural approach, If a firm's organisational c...

If a firm's organisational characteristics have not any implications for its behaviour or more possibly have implications that can be taken into account without adopting a behaviou

Pigou effect, The pigou effect, also called the real balance effect, is nam...

The pigou effect, also called the real balance effect, is named after the well known Cambridge school economist Arthur Cecil pigou who had first clearly formulated the relationship

Monopolistic versus perfect competition, firms both in monopolistic and per...

firms both in monopolistic and perfect competition tend to make normal profits but why do they criticize only monopolistic competition

Investment, Investment   Investment is the process of increasing the ...

Investment   Investment is the process of increasing the productive capital stock of a country, or can be defined as the production of goods not for immediate consumption.  T

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd