Economics, 3rd Edition

The Relationship between Marginal Cost and Average Total Cost 

Whenever marginal cost is less than 

average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, 

average total cost is rising. This feature of Luciano’s cost curves is not a coincidence from the particular 

numbers used in the example: it is true for all firms and is a basic mathematical relationship.

To see why, refer to your understanding of averages and consider what happens to average cost as 

output goes up by one unit. If the cost of the extra unit is (say) 

€5 and the cost of the next unit produced 

is 

€3, what will happen to the average? The answer is that the average will fall. If the cost of the additional 

unit was 

€8 then the average will increase. The cost of an extra unit is the marginal cost, so it follows that 

if marginal cost is less than average cost, average cost will be falling; and if marginal cost is above average 

cost, average cost will be rising.

This relationship between average total cost and marginal cost has an important corollary: the mar-

ginal cost curve crosses the average total cost curve at its minimum. Why? At low levels of output, 

marginal cost is below average total cost, so average total cost is falling. But after the two curves cross, 

marginal cost rises above average total cost. For the reason we have just discussed, average total cost 

must start to rise at this level of output. Hence, at this point of intersection the cost of an additional unit 

is the same as the average and so the average does not change and the point is the minimum of aver-

age total cost.

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CHAPTER 6  BACKGROUND TO SUPPLY: FIRMS IN COMPETITIVE MARKETS  143