# 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.

**Where**

**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 X
_{1}and X_{2}

**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 X
_{1}and X_{2}.