Relationship between AC and MC
There is a close relationship between AC and MC. MC is the change in TC resulted from the change in the production of one more unit of output whereas AC is the total cost divided by the output. Both AC and MC are derived from TC.
MC = ∆TC / ∆Q
AC = TC / Q
The relationship between these two can be explained with the help of the following diagram:
In the above figure, SMC represents the short-run marginal cost curve and SAC represents the short-run average cost curve. SMC and SAC intersect each other at the minimum point of SAC. It lies to the right of A, the minimum point of SMC I.e point B. The relationship between these two can be summarized as follows:
- Both AC and MC curve are calculated from the total cost.
- Both AC and MC are ‘U’ shaped.
- When AC is falling, the MC curve lies below AC and MC falls faster than AC.
- When AC is rising, the MC curve lies above the AC and MC rises faster than AC.
- When AC is minimum, MC=AC
- MC intersects at the minimum point of AC.
- MC cuts AC from below.