RELATIONSHIP BETWEEN AVERAGE COST AND MARGINAL COST

• RELATIONSHIP BETWEEN AVERAGE COST AND MARGINAL COST
• MICRO ECONOMICS
• DR. SHASHI AGGARWAL
• AVERAGE COST

1. THE AVERAGE COST OF PRODUCTION IS THE  COST OF PRODUCTION PER UNIT OF OUTPUT
2. AC = TC/Q
3. AC= AFC +AVC
4. AVERAGE FIXED COST:- TFC/TQ
5. AVERAGE FIXED COST IS THE PER UNIT COST OF THE FIXED FACTOR OF PRODUCTION.

• SHAPE OF AVERAGE COST
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• MARGINAL COST

1. ADDITION MADE TO THE TOTAL COST BY PRODUCTION OF ONE MORE UNIT OF A COMMODITY.
2. MC =TC_N-TC_N-1

3.     MC= ΔTC/ΔQ

4.     LIKE COST OF PRODUCING 10 CHAIRS IS 100 AND AS WE PRODUCE ONE MORE CHAIR THE TOTAL COST IS 109

5.     MC=109-100=9 OR MC=9/1

• MARGINAL COST
• IS THE NET ADDITION MADE TO TOTAL COST BY PRODUCING ONE EXTRA UNIT OF A COMMODITY

• SHAPE OF MARGINAL COST
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• EXPLANATION
• RELATIONSHIP BETWEEN AC AND MC
• BOTH AVERAGE COST AND MC ARE DERIVED FROM TC:-

1. AVERAGE COST IS PER UNIT COST
2. AC= TC/Q
3. MARGINAL COST IS ALSO CALCULATED FROM TOTAL COST AND ADDITION MADE TO TOTAL COST BY PRODUCING ONE MORE UNIT OF OUTPUT IS CALLED MC
4. MC =TC_N-TC_N-1

• RELATIONSHIP

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• WHEN AC FALLS, MC IS ALSO FALLING
• RATE OF FALL IN MC IS MORE THAN FALL IN AC. WHEN AC CURVE FALLS MC CURVE WILL LIE BELOW IT

• WHEN AC RISES, MC IS ALSO RISING
• RATE OF RISE OF MC IS MORE THAN AC SO MC CURVE LIES ABOVE AC
• MC CUTS AC AT ITS MINIMUM POINT
• HERE THE MC=AC
• MUTUAL ATTRACTION BETWEEN MC AND AC
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1. IF MC IS MORE THAN AC THEN IT PULL UPWARD
2. MC IS LESS THAN IT PUSHES AC DOWNWARD AND MC IS EQUAL TO AC THEN IT IS CONSTANT