How does a firm's marginal cost and average cost relate to each other? (Microeconomics)

Average costs represent the total cost of a firm divided by the total number of units produced, and Marginal cost meanwhile represents the extra costs incurred by a firm of producing an additional unit of output. Therefore It can be deduced that marginal costs will always represent the trend (or gradient) of the average cost curve. Therefore as marginal cost is below average cost, you will be able to produce the extra unit at a lower cost than all the other units, thus bringing average costs down. However as the marginal curve will get to a point in the Short run where resource constraints create diminishing marginal returns, average costs will rise again. This will occur, from the point where Marginal returns is equal to Average returns; at that point an additional unit produced will cost more than the average unit produced so far, thus bringing average costs up. Thus the Marginal cost curve will help determine the behaviour of the Average cost curve.

Answered by Manel B. Economics tutor

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