The relationship of marginal cost to average total cost

Figure 9 brings together the average and marginal cost curves. The centerpiece of Figure 9 is the U-shaped ATC curve. What is of special significance is its relationship to marginal costs. Notice that the MC curve intersects the ATC curve at its lowest point(point m). This will always be the case. So long as the marginal cost of producing one more unit is less than the previous average cost, average costs must fall. Thus average costs decline as long as the marginal cost curve lies below the average cost curve, as to the left of point m in Figure 9.

We have already observed, however, that marginal costs themselves tend to rise as output expands, largely because additional workers reduce the amount of land and capital available to each worker (in the short run, the size of plant and equipment is fixed). Consequently, at some point (m in Figure 9) marginal costs will rise to the level of average costs.

As marginal costs continue to rise beyond point m, they begin to pull average costs up, giving the average cost curve its U shape. Average costs increase whenever marginal costs exceed average costs. This is the case to the right of point m, since the marginal cost curve always lies above the average cost curve in that part of Figure 9.

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