Question

Explain the relationship between average total cost curve, average variable cost curve and marginal cost curve.

Answer 1

Relationship Between ATC, AVC, and MC:

• Formula Relation:
  ATC=AVC+AFC
  (AFC = Average Fixed Cost)
• Shape of the Curves:
  All three curves (ATC, AVC, and MC) are U-shaped due to the Law of Variable Proportions.
• Gap Between ATC and AVC:
  
  • The difference between ATC and AVC is AFC.
  • Since AFC continuously falls as output increases, the gap between ATC and AVC narrows.
• MC and AVC/ATC Relationship:
  • When MC < AVC or ATC, both AVC and ATC fall.
  • When MC = AVC or ATC, AVC and ATC are at their minimum point.
  • When MC > AVC or ATC, both AVC and ATC rise.
• MC Curve Cuts AVC and ATC:
  • MC curve intersects AVC and ATC at their minimum points.
• MC is Affected by Variable Cost Only:
  • Since MC is derived from TVC, it is not affected by fixed cost.