Page 194 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

Table 8: Average Cost and Marginal Cost of Product Notes
Production TC FC VC AFC AVC AC MC
0 10 10 0 ∞ 0 ∞ ∞
1 20 10 10 10 10 20 10
2 28 10 18 5 9 14 8
3 34 10 24 3.3 8 11.3 6
4 38 10 28 2.5 7 9.5 4
5 42 10 32 2.0 6.4 8.4 4
6 48 10 38 1.7 6.3 8 6
7 56 10 46 1.4 6.6 8 8
8 72 10 62 1.2 7.8 9 16

1. When AC Falls, MC is less than AC: If the AC curve falls below the (MC) curve will be below it
because the average cost (AC), average fixed cost (AFC) and average variable cost (AVC) is the sum
of the marginal costs only variable cost (VC) involves changes in the Fig. 9.9, BF makes it clear that
the MC curve to reduce the cost of the variable rate both variable and fixed costs are greater than the
sum of the rate of reduction. Figure 9.9 is also shows that after the point F, the additional variable
costs or marginal cost increase is initiated; the average of the sum of the fixed and variable costs are
falling through E, AC curve point. Both AC and MC at point E are equal.

Fig. 9.9

Y
AC and MC Curves

Cost (`) A MC AC

B E
P
F

O X
Q Q
1

Does MC Rise When AC is Decreasing?
Generally, it is said, when AC is low, MC is low too. But this statement for each level of production is not right. This is
possible when AC is decreasing, then AC is increasing. It can be determined by Fig 9.9 that the output OQ and MC are
both low. But after that point (after F) has grown in the MC, AC continues to fall. This is because the minimum point of
the MC F, AC, is the lowest point since before E, AC falls more rapidly than MC. After point F, additional variable cost
or marginal increase in costs, but the combined average variable cost and fixed cost falls to AC curve E is the point. One
point E at the AC and MC are equal to each other.
Efficiency of AC on expanding the MC for the latter may be declining while the average price is less than marginal cost.

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