Relationship between Average Cost and Marginal Cost

There is a direct relationship between AC and MC curves. When AC falls MC also falls and is below AC. When AC is rising, MC also rises and is above AC. When AC is at its minimum MC equals it.

It is easier to understand the relationship with the help of Fig. This fig shows that if MC is more than AC, it pulls AC upwards. If M/c is less than AC it pushes AC downward; when MC= AC; is constant or equal to MC.

The foregoing table and diagram reveal the relationship between AC and MC as under:

  1. When MC is less than AC (or MC curve remains below AC curve), The AC falls. Example 1 to 5 units and diagram up to point B (or OM1 output shows this situation.
  2. When MC comes equal to AC, AC become constant. This is the minimum point of AC and it is at this minimum point that MC curve cuts the AC from below. See 6th unit in the example and point B in the diagram.
  3. When MC is higher than AC (or MC curve rises above the AC curve), AC stares to rise. It is shown as 6th unit onwards in the example and point B onwards in the diagram.

Thus AC-MC relationship can be summarized as under. So long as MC is below AC, it is pulling AC down; when MC gets to be just equal to AC, AC is neither rising nor falling and is at its minimum; and when MC is above AC, it is pulling AC up.

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