Why does the marginal cost curve always intersect with the average total cost curve at its lowest point?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The reason for this is that the marginal cost is part of the average total cost.  Therefore, a change in the marginal cost of making the next unit of output will affect the average total cost.

We know that the marginal cost (MC) curve is upward sloping when it intersects with the average total cost (ATC) curve.  So now let us think about why the MC curve must intersect with the ATC curve at the ATC's minimum.

When the MC is less than the ATC, each new unit of output lowers the the ATC.  This is mathematically necessary.  If you have an average and you add another number that is lower than the average to it and then you take the new average, it has to go down because the number that was added to it was lower.   This means that for as long as MC is less than ATC, ATC will go down with each extra unit made.

At some point, MC rises to the point that it equals ATC and the curves intersect.  Now let's look at what happens from there.  MC keeps rising.  It is now greater than ATC.  This means that ATC has to go up because every new unit produced increases ATC.

When we put this all together, it means that ATC decreases as MC rises to intersect with it.  After they intersect, they both rise.  This happens because MC is part of ATC.

 

thetall's profile pic

thetall | (Level 3) Educator

Posted on

Marginal cost is the cost incurred in producing one more unit, and it is solely affected by variable costs. Marginal cost can be calculated by getting the change in total cost when one unit is produced or added. The cost is also affected by the principle of variable proportions given that it is derived from variable costs. Its curve will drop briefly at the start before rising sharply.

The marginal cost curve cuts the average total cost curve from below and at its lowest point. This situation occurs because when the marginal cost curve is below the average total cost curve, it drops the average total cost. During the marginal cost curve’s upturn, the average total cost curve also rises, but not as sharply as the marginal cost curve. Thus, the marginal cost curve eventually cuts the average total cost curve, and both continue rising at different rates.

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