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11.4 The Shape of the Short-Run Cost Curves

When the marginal product of labor is rising, marginal cost is falling, because each additional worker adds more to total output; when the marginal product of labor is falling, marginal cost is rising, because each additional worker adds less to total output.

The relationship between the marginal and the average is simply a matter of arithmetic. When a number (the marginal cost) being added into a series is smaller than the previous average, the new average will fall; when a number (the marginal cost) being added into a series is larger than the previous average, the average will rise.

Exhibit 1: Marginal Product and Marginal Cost

The average total cost (ATC) curve is usually U‑shaped. The average cost per unit declines at first as output expands, but then starts increasing as output expands still further beyond a certain point.

The reason for high average total costs when the firm is producing a very small amount of output is the high average fixed costs. It is the declining AFC that is primarily responsible for the falling ATC.

The average total cost curve rises at high levels of output because of diminishing marginal product. Diminishing marginal product sets in at the very bottom of the marginal cost curve. Diminishing marginal product causes MC to increase, eventually causing the AVC and ATC curves to rise. At very large levels of output, where the plant approaches full capacity, the fixed plant is overutilized, and this leads to high MC that causes a high ATC.

Exhibit 2: U-Shaped Average Total Cost Curve


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Exhibit 3: Marginal Cost and Average Variable Cost


Exhibit 4: Marginal Cost and Average Total Cost


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When AVC is falling, MC must be less than AVC; and when AVC is rising, MC must be more than AVC.

MC is equal to AVC at the lowest point on the AVC curve. The same is true for the ATC curve--MC is equal to ATC at the lowest point on the ATC curve.


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