Explain the Relationship between Average Variable Cost, Average Total Cost, Average Fixed Cost and Marginal Cost with diagram.
Relationship Between AVC, MC, AC and MC.
X1 → Output corresponding to minimum point of MC curve.
X2 → Output corresponding to minimum point of AVC curve.
X3 → Output corresponding to minimum point of AC curve.
AVC → AVC is defined as the variable cost of producing per unit of the commodity. It is obtained by dividing TVC by the level of output. That is,
AVC = TVC/X(No. of units produced)
ATC or AC → AC is defined as the cost of producing per unit of the AC = TC (total cost)/X
AFC → AFC is defined as the fixed cost of producing per unit of the commodity. AFC = TFC/X
MC → MC is defined as addition made to total cost or total variable cost when one more unit of output is produced.
Relationship between AC and MC
- Both AC and MC curves are u-shaped, reflecting the law of variable proportion.
- When AC is falling, then MC is below AC.
- When AC is rising, then MC is above AC.
- When AC is neither falling nor rising, then MC = AC (Point C).
- MC curve cuts the AC curve at its minimum point.
- There is a range over which AC is falling but MC is rising. This range is between the output levels X1 and X2
Relationship between AVC and MC
- Both AVC and MC curves are u -shaped reflecting the law of variable proportion.
- When AVC is falling, MC is below AVC.
- When AVC is rising, MC is above AVC.
- When AVC is neither falling nor rising, then MC = AVC (point b).
- The minimum point of AVC curve (point b) will always occur to the right of the minimum point of MC curve (point a).
- There is range over which AVC is falling and MC is rising
- The range is between the output level X1 and X2.