## >> Wednesday, September 24, 2014 Following observations with regards to the relation between average cost and marginal cost. We divide this relationship into two parts. a) Relationship of average cost and marginal cost and b) relationship of total cost and marginal cost.

Remember : Average cost = TC/ Quantity

1. When AC Falls, MC is Lower than AC

When average cost falls, marginal cost is less than AC.

2. When AC Rises, MC is Greater than AC

When average cost starts rising, marginal cost is greater than average cost.

3. When AC does not Change, MC is equal to AC

When average cost does not change, MC = AC. It happens when falling AC reaches its lowest point.

4. Total Cost is the Basis of Marginal Cost

Marginal cost is estimated as the difference between total cost of two successive units of output.

MCn = TCn - TC n-1

5. When MC is Diminishing, TC will increase at a Diminishing Rate

You can see this trend on the graph paper. MC will diminish and TC will increase with low rate.

6. When MC is Rising, TC will Rise with Increasing Rate

Same you can see on graph paper. MC will rise and TC will rise at increasing rate.

7. When MC Reaches at Lowest Point, TC will Stop to Rise

See same on graph paper. |