Question

Mr. Sanchez is a Colombian economist living in Bogota. He is currently analyzing the costs of production. He observes the marginal-cost and average-total-cost curves for a typical firm. He wonders why the curves have the shapes that they do and why they intersect where they do.

Explain!

Answer 1

1. MARGINAL COST CURVE:-

Marginal cost curve is a graphical representation showing relationship between output and marginal curve incurred by a particular curve. Marginal cost is the change in total cost and variable cost which is caused by production of one more unit.

MARGINAL COST CURVE SHAPE:-

Marginal cost is a "U" shaped curve. This signifies that the marginal cost initially falls reaches a minimum point and then began to rise.

Graphical representation:-

WHY MARGINAL COST IS "U" SHAPED

The reason is that in the initial stage when firm is producing small quantities MC is relatively high. With addition production of units, MC starts declining and then it reaches a point where it is minimum and then it stats increasing. This is because of LAW OF DIMINISHING RETURNS.

2. AVERAGE TOTAL COST CURVE:_

Average total cost is the per unit cost of a product produced. Average total curve also known as Average cost is a graphical representation of Cost and Units of output.

AVERAGE COST CURVE SHAPE:-

Average cost is also a "U" shaped curve. Average cost is the sum of Average fixed cost and Average variable cost.

GRAPHICAL REPRESENTATION:-

WHY AVERAGE COST IS "U" SHAPED

It signifies that in initial stage of production, law of increasing returns or diminishing cost is applied due to which AC falls. After a certain point, AC becomes constant as output becomes optimum and law of constant cost applies. The time when production starts increasing, law of diminishing returns or increasing costs apply and AC began to increase.

3. WHY MC AND AC INTERSECT WHERE THEY DO

The point where Marginal cost intersect Average cost, is when MC = AC.  At this point AC is at its lowest point. This signifies that when marginal cost is equal to average cost, then Average cost will neither rise nor it will fall which means it raches its minimum.

Graphical representation:-

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