The Relation between the Average and Marginal Cost Curve
The second aspect of short run average costs is average variable cost. Average . Relationship between Average Cost and Marginal Cost. If the average cost. Personal finance and economics. Marginal Cost (MC) & Average Total Cost ( ATC) Now divide total cost by quantity of output to get average total cost. In economics, the total cost (TC) is the total economic cost of production. It consists of Relationship Between Average and Marginal Cost. Average cost and.
I've probably got some negotiating power now with some of these suppliers. I'm like, "Look, I'm buying a lot more oranges now. The incremental from this to this is only Then it starts getting more expensive again. What's probably happening is, as I start buying more and more oranges from the local distributors, I get a better, better deal.
They view me as a bigger and bigger customer, but once I tap them out, then I have to go further and further away. Maybe it's costing more to transport them, or maybe these other suppliers don't take me as seriously or I go to slightly more expensive suppliers because I've tapped out all of the cheap ones, and so my incremental variable costs for the next 1, and we'll think about that later, keeps going up and up and up.
The total costs, obviously, are just the sum of my fixed costs and my variable costs. Let's calculate using, and I'm just using Excel, here. Let's calculate the average fixed cost, so we don't want to divide by zero. Remember, the average cost, the average fixed and the average variable and the average total cost, these are each of those costs divided by the total amount of juice that I'm producing.
You can kind of view them as the cost per gallon.
Economics: Marginal Cost and Average Cost curves
So that we're thinking of the average fixed cost per gallon, so what we're going to do, so I'm writing equal to let Excel know that I'm doing a formula now, this is going to be equal to my fixed cost divided by, so divided by, divided by my gallons, and you can see that's G8 divided by F8, and actually, I guess you can't see my Gs and Fs, but this is the 8th row.
If I want my average variable costs, that's going to be my variable costs divided by, divided by my total number of gallons, so that's 50 cents, so that's the first 1, gallons to produce the orange juice, the orange juice for That includes the transportation cost.
Then the total is just the sum of these two things. Or, we could have done it another way.Concept of Cost (PART 3), Relation between TC and MC & Relation between MC and AC in hindi
We could have taken this right We could have said that this is just equal to, this is just equal to our total cost, our total cost divided by the total number of gallons. Either way, you'll get the same thing, and maybe I'll do a video mathematically on why that is, or maybe you should explore that yourself.
Now, the marginal cost. This is equal to our change in cost, our change in total cost divided by our change in gallons of juice. Our change in total costs is going to be 1, minus 1, That's our change in total cost divided by our change in gallons, divided by 1, minus 0, our change in gallons, and that give us 50 cents.
- Marginal cost and average total cost
- What is the Relationship between Average Cost and Marginal Cost?
- Average cost
Now, this is the fun thing about spreadsheets, one of the many fun things of spreadsheets, is now I can select all of these and fill in all of the things below it. They will use the same relative calculations. I'm going to fill without formatting. Now, what was neat here, and I already set up this chart ahead of time, is to plot these things right over here, and so we see what's going on.
This is a plot that we looked at in the last video, when we thought about software developers.
Now, if he produces one unit more and his average cost falls, it means that the additional unit must have cost him less than Rs. On the other hand, if the production of the additional unit raises his average cast, then the marginal unit must have cost him more than Rs. And finally, if as a result of production of an additional unit, the average cost remains the same, then marginal unit must have cost him exactly Rs.
The relationship between average and marginal cost can be easily remembered with the help of Fig. It is illustrated in this figure that when marginal cost MC is above average cost ACthe average cost rises, that is, the marginal cost MC pulls the average cost AC upwards.
On the other hand, if the marginal cost MC is below the average cost AC ; average cost falls, that is, the marginal cost pulls the average cost downwards. When marginal cost MC stands equal to the average cost ACthe average cost remains the same, that is, the marginal cost pulls the average cost horizontally.
As long as short-run marginal cost curve MC lies below short-run average cost curve, the average cost curve AC is falling. When marginal cost curve MC lies above the average cost curve AC, the latter is rising. It is important to note that we cannot generalise about the direction in which marginal cost is moving from the way average cost is changing, that is, when average cost is falling we cannot say that marginal cost will be falling too.
When average cost is falling, what we can say definitely is only that the marginal cost will be below it but the marginal cost itself may be either rising or falling.
Likewise, when average cost is rising, we cannot deduce that marginal cost will be rising too. When average cost is rising, the marginal cost must be above it but the marginal cost itself may be either rising or falling.
As a result, the average cost is falling.