Question

Explain why MC intersects ATC at the minimum point. Explain why MC intersects AVC at the minimum point.

Answer 1

Marginal cost is the cost to produce an additional unit of a good. In the beginning, it falls but as we produce more unit of goods it starts rising as we can see in the diagram. ATC stands for Average Total Cost which is total cost divided by output and AVC stands for Average Variable Cost which is Total Variable cost divided by output.

In the above diagram, we can see that initially, the marginal cost is lower than the average total cost. This is because it is cheaper to produce an additional cost of good than the average total cost, which brings the ATC curve down. As the firm starts producing more good, the marginal cost starts rising, but it is still lower than ATC, due to which ATC continues to fall. A point comes when MC intersects the ATC curve at this point MC and ATC curve both are equal to each other and ATC is at its minimum because, after this point, the MC curve begins moving above the ATC curve. This means that the cost to produce an additional unit is more than Average total cost. So, due to the rise in the cost, the ATC curve starts moving upwards.

So, the intersection point is the minimum point of the ATC curve because after this point MC is more than the ATC curve, which leads to upward pressure on ATC and makes it upward sloping.

When we deduct the fixed cost from the total cost we get total variable cost and dividing the total variable cost by output we get Average variable cost. So, the relationship between AVC curve and the MC curve is akin to the ATC curve and MC curve. When the MC curve is lower than AVC, it keeps falling and than it intersects AVC curve at its minimum point because after that cost to produce an additional unit is more than the average variable cost. This makes AVC curve upward sloping after intersection which is the minimum point of AVC curve.