Economics, 3rd Edition

Understanding Averages and Marginal Values

When first encountering average and marginal costs, it can be a little confusing, so it is often worth think-

ing about these values in a different context. Sebastian is an up-and-coming basketball player. In the first 

18 games of the season Sebastian has scored a total of 306 points. The average points per game (PPG) at 

this stage of the season, therefore, is 306/18 

= 17 points per game. The number of points that Sebastian 

scores in each successive game is his marginal score. If Sebastian scores 15 points in the 19th game his 

total points score is now 321 and so his average will now fall to 321/19 

= 16.89. If in the next three games 

he scores 12, 14 and 10 then the marginal points score continues to be below the average and so his 

average will continue to fall. At the end of the 22nd game he will have scored a total of 357 points and his 

average will have fallen to 16.22. If in the next four games he scores 20, 18, 22 and 20 points, then each 

successive game sees his marginal points score being better than his average and so the average will 

be pulled up. At the end of 26 games, therefore, his total points score will be 437 and his average PPG will 

have risen to 16.8.

So, if Sebastian’s marginal points score in each successive game is less than his average, his average 

will fall but if his marginal points score in each game is more than his average points score then his aver-

age will rise. It’s the same principle for firms’ costs!

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CASE STUDY

Thinking about average and marginal 

costs by using a context such as sport 

helps develop a deeper understanding 

of the conceptual and mathematical 

relationship between the two. We have 

used basketball but you can apply it to 

almost any sport.

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144  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

the marginal cost curve falls. After 5 bagels per hour, the firm starts to experience diminishing marginal 

product, and the marginal cost curve starts to rise. This combination of increasing then diminishing mar-

ginal product also makes the average variable cost curve U-shaped.

Despite these differences from our previous example, Berit’s cost curves share the three properties 

that are most important to remember:

 

●

Marginal cost eventually rises with the quantity of output.

 

●

The average total cost curve is U-shaped.

 

●

The marginal cost curve crosses the average total cost curve at the minimum of average total cost.