Short Run Cost Curve: Marginal Cost Curve

Marginal Cost :

· Marginal cost is the addition to total cost as one more unit of output is produced.

· Marginal cost is the addition to total cost of producing ’n’ units instead of (n -1 ) units.

MCn = TCn — TC(n -1 )

· Marginal cost is the change in total cost as a result of change in output by one unit,

MC = ∆TC / ∆Q

Where ∆TC = change in total cost

∆Q = change in quantity of output

Marginal Cost Curve :

MC curve

• Marginal cost is independent of fixed cost, since marginal cost is an addition to total cost when one additional unit of output is produced.
• Marginal cost is associated with Total Variable Cost and Total Cost. Thus, marginal cost curve derived from TVC curve is the same as derived from TC curve. Therefore MC curve is common both to AVC curve and ATC curve.
• MC curve cuts ATC and AVC curves at their minimum points.
• MC curve is ‘U’ — shaped, as the output increases MU curve slopes downward reaches to minimum and then starts sloping upward beyond OQ level.
• The U — shape of MC curve is because it follows directly the law of variable proportions.
• Its negative slope is due to increasing returns to the variable factor and its positive slope due to decreasing returns to the variable factors.
• TVC can be calculated as the sum total of MC of various units of output

TVCn = MC1 + MC2 + …..+ MCn

Relation between Average Cost (AC) and Marginal Cost (MC) :

Relation between MC and AC

1. Both Average Cost (AC) and Marginal Cost (MC) curves are ‘U’ — shaped, reflecting the Law of Variable Proportions.

2. When AC falls with increase in output, MC is lower than AC, i.e. MC curve lies below the AC curve.

3. When AC rises with increase in output, MC is higher than AC, i.e. MC curve lies above the AC curve.

4. When AC is neither falling nor rising, then MC equals AC (MC = AC). Here, AC is minimum and constant and it lies at the level of optimum output.

5. MC curve curs AC curve (AVC and ATC curves both) at its minimum point.

6. At zero level of output both AC and MC are indeterminate.

Relation Between Marginal Cost and Average Variable Cost :

Relation between MC and AVC

1. Both AVC and MC curves are ‘U’ shaped reflecting the Law of Variable Proportions.

2. When AVC is falling, MC curve is below AVC curve.

3. When AVC is rising, MC curve is above AVC curve.

4. When AVC is neither falling nor rising then MC = AVC.

5. The minimum point of AVC curve will always occur to the right of the minimum point of MC curve.

Relation Between Total Cost (TC) curve and Marginal Cost (MC) curve:

Relation between MC and TC

1. Marginal cost is addition to total cost when one more unit of output is produced. MC is calculated as

MCn = TCn — TC (n-1)

2. When TC rises at a diminishing rate, MC declines.

3. When the rate of increase in TC stops diminishing, MC is at its minimum point.

4. When the rate of increase in total cost (TC) starts rising (at increasing rate) , MC is increasing.

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