Average and marginal costs help

Hi, I literally cannot understand how average and marginal costs differ and why their graphs are different. I get that the formulas are different but other than that I’m so lost- can someone pls help!

Reply 1

MindMax2000

Universities Forum Helper

Original post by Purpllegrape9

Read the following:
https://www.wallstreetmojo.com/average-cost-vs-marginal-cost/
https://www.educba.com/average-cost-vs-marginal-cost/
https://www.hamrolibrary.com/2019/05/relationship-between-ac-and-mc.html
https://commerceaspirant.com/relationship-between-total-cost-marginal-cost-and-average-cost/
https://commerceiets.com/relationship-between-ac-and-mc/

Reply 2

toxicgamage56

Universities Forum Helper

Marginal cost decreases in the short run as more FoPs are introduced to a production process, which improves efficiency, and lowers cost of productions. This leads to a fall in average total costs. However, marginal costs start to rise after diminishing marginal productivity sets in - this is when fixed FoPs in the short-run such as capital and land, restricts variable FoPs which is normally labour (if you think about it, there are only so many workers that can operate in one room), which leads to a loss of efficiency and marginal costs start to rise. As long as marginal costs are below average total costs, average total costs fall, but you can see when average total costs rise after marginal costs have cut average total costs at its lowest point.

The long run average total cost curve is the same shape, but refers to the concepts of economies and diseconomies of scale, where the lowest point is known as the MES (minimum efficient scale), and there are no more increasing returns to scale after this point.

You might want to know the distinction between MC, ATC, AFC, AVC, TC, TFC, TVC, as these are technically different things with different curves (however, wouldn't worry too much, as these distinctions would probably only appear during a multiple choice question, never a long answer question, where you are only really required to know MC and AC under the context of the costs/revenue diagram). AVC is important to know as a separate curve to ATC, as you must know what the difference between fixed and variable costs are (fixed costs such as rent vs variable costs such as cost of raw materials which will increase as you produce more output). You need to know this distinction to be able to identify the shutdown condition (where AR < AVC), which is when a firm would leave a market.

I hope this helps, as a fellow economics student. If the answer is confusing, just focus on the first paragraph, since that's what's most relevant to the question you've asked.