Question
Define cost. State the relation between Marginal Cost and Average Cost.
OR
Explain the relation between AC and MC.
OR
Explain the relation between AC and MC.
✓
Answer
Cost refers to the total expenses incurred in the production of a commodity. MC affects AC. The relationship between MC and AC is as follows:
The given diagram shows that so long as MC curve lies below AC curve, AC curve is falling. This is up to point M. When AC = MC, AC is minimum. MC curve always intersects AC at its minimum point, which is M in the diagram. When MC curve lies above the AC curve, AC starts rising. This is after point M.
- When MC < AC, then AC falls.
- When MC = AC, then AC is constant and minimum.
- When MC > AC, then AC rises.
- MC curve always intersects AC curve at its minimum point from below.
The given diagram shows that so long as MC curve lies below AC curve, AC curve is falling. This is up to point M. When AC = MC, AC is minimum. MC curve always intersects AC at its minimum point, which is M in the diagram. When MC curve lies above the AC curve, AC starts rising. This is after point M.
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