Average Total Cost is the sum of average variable cost and average fixed cost. or we can say, average cost is equal to the total cost divided by the number of units produced.
ATC = TC/Q
Marginal Cost is the addition made to the total cost by producing 1 additional unit of output.
Marginal Cost = Total cost of nth unit - Total cost of (n-1)th unit.
MC = TCn – TCn-1 (e.g. – MC of 6 th unit = Total cost of 6th unit – Total cost of 5th unit)
Marginal cost can also be defined as the change in total cost (∆TC) due to change in quantity produced(∆Q).
MC = ∆TC/∆Q
Marginal Cost and Average Cost curves
Suppose, there is a firm and it’s cost and production values can be seen from the following table.
Putting the above table in the form of a graph would give
Relationship between Marginal Cost and Average Cost
• Whenever marginal cost is less than average total cost, average total cost is falling.
• Whenever marginal cost is greater than average total cost, average total cost is rising.
• The marginal-cost curve crosses the average-total-cost curve at the efficient scale.
• Efficient scale is the quantity that minimizes average total cost( point S in above diagram)
Three Important Properties of Cost Curves are
1. Marginal cost eventually rises with the quantity of output.
2. The average-total-cost curve is U-shaped.
3. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.