Understanding the Relationship between “Marginal Cost” and “Average Cost”
To the left side of Q, marginal costs are smaller than average total costs causing average to decline (figure 9.6). Likewise, to the right side of Q, marginal costs are higher than average total costs causing average to increase.
The relationship between marginal cost and average cost can be easily established with the help of simple arithmetic. Suppose, a student obtains 60 percent in Physics, 70 percent in Chemistry and 80 percent in Mathematics.
The average of these three subjects is 70 percent. What happens to the average if the student gets 70 percent in Biology? In this situation, the existing average will remain unchange.
But, in Biology, if he secures marks which is less than the existing average, say 60 percent, than the prevailing average (70 percent) will reduce to 67.5 percent. Similarly, securing marks higher than the prevailing average; say 80 percent is Biology, will cause an increase in the average from 70 to 72.5.
Thus, if the marginal number is more than the average, then it will ‘pull’ the existing average in the upward direction and if the marginal number is less than the average, then it will ‘push’ the existing average in the downward direction.
Since it is established that AC curve is downward sloping so long as MC lies below it and AC curve is upward rising as long as MC lies above it, MC curve can only intersect AC at its lowest point.