Average Cost and Marginal Cost

 

Average Cost (AC)

It is the ratio between the total cost and quantity produced. It can also be defined a the cost per unit.

Mathematically;

AC= TC/Q

Where;

TC= Total Cot

Q=Quantity

Marginal Cost (MC)

It is the ratio between the change in total cost and change in quantity produced. In other words, MC can be defined as the change in total cost due to the production of one more unit of output.

Mathematically;

MC=dTC/dQ

Or MC=TC2-TC1/Q2-Q1

Where:

dTC= change in total cost i.e. TC2-TC1

dQ= change in quantity i.e. Q2-Q1

Derivation of Average Cost (AC) and Marginal Cost (MC)

Quantity	Total Cot (TC)	Average Cost (AC)	Marginal Cost (MC)
1	10	10	10
2	18	9	8
3	24	8	6
4	28	7	4
5	30	6	2
6	36	6	6
7	49	7	13
8	64	8	15

In the above graph, the initial stage both AC and MC are decreasing as a result the curves are downward sloping. Since, the decreasing rate of MC is greater than AC, it attains the minimum point before AC and lies below AC. While rising, MC cuts the AC at its minimum point where AC=MC.

Relationship between AC and MC:

a.      Both AC and MC are calculated from the TC

b.     Both AC and MC are U-shaped

c.      When AC is falling, MC lies below the AC and MC falls faster than AC

d.     When AC is rising, MC lies above the AC and MC rises faster than AC

e.      When AC is minimum MC equals to AC

f.       MC intersects at the minimum points of AC