Average and marginal cost curves and their shapes

Overview

Shape of the short run average total cost curve, shape of the marginal cost curve in the short run and shape of the total variable cost curve.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Describe the shape of the short run average total cost curve.

   Model answer

   The short run average total cost curve is U-shaped. Unit costs fall at first as fixed costs are spread, then rise as diminishing returns lift marginal cost.

2. 2

   Why does the short run average cost curve fall at low levels of output?

   Model answer

   Average fixed cost falls sharply when output is low and rising. Greater returns to the variable factor also pull average variable cost down at first.

3. 3

   Why does the short run average cost curve rise at high levels of output?

   Model answer

   The law of diminishing returns pushes marginal cost above average cost as output expands. A rising average variable cost then outweighs the falling average fixed cost.

4. 4

   Where does the marginal cost curve cut the average total cost curve?

   Model answer

   The marginal cost curve cuts the average total cost curve at its lowest point. Average cost is at a minimum exactly where marginal cost equals it.

5. 5

   Explain why marginal cost cuts average cost at the minimum of average cost.

   Model answer

   Average cost falls whenever marginal cost lies below it and rises whenever marginal cost lies above it. The two values are therefore equal at the turning point of average cost.

6. 6

   Where does the marginal cost curve cut the average variable cost curve?

   Model answer

   The marginal cost curve also cuts the average variable cost curve at its minimum point. The same relationship between a marginal and an average value applies.

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