Average and Marginal Cost

Total costs tell you the overall bill, but firms make decisions using per-unit costs. How much does each unit cost on average? How much does the next unit cost? The average and marginal cost curves answer both — and they’re the most important diagrams in microeconomics.

Key Term

Per-Unit Cost Curves

Average Total Cost: $A T C = T C / q = A F C + A V C$

Average Variable Cost: $A V C = V C / q$

Average Fixed Cost: $A F C = F C / q$ (always declining)

Marginal Cost: $M C = Δ T C /Δ q = Δ V C /Δ q$

( $M C$ is the same whether you compute it from $T C$ or $V C$ , because $F C$ doesn’t change with $q$ .)

The four per-unit cost measures

The key relationships among these curves:

$A T C = A V C + A F C$ always (since $T C = V C + F C$ , divide by $q$ )
$A F C$ always declines (a constant $F C$ spread over more units)
$A T C$ and $A V C$ are U-shaped (they fall at first, then rise)
$M C$ crosses $A V C$ at $A V C$ ’s minimum
$T C = V C + F C$ 0 crosses $A T C$ at $A T C$ ’s minimum

Rule #4 and #5 follow from the same marginal-average logic you saw with $T C = V C + F C$ 3 and $A P$ : when the marginal is below the average, it pulls the average down; when above, it pulls it up.

Interactive — Per-pizza costs: MC, ATC, AVC, AFC

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Same pizza-shop data, this time per pizza. Walk through 4 output levels and watch MC cross ATC right at the minimum.

Tip

Why $MC$ Hits $ATC$ at Its Minimum

Think of it like GPA. Your cumulative GPA ( $A T C$ ) falls when your semester GPA ( $M C$ ) is below it. Your cumulative GPA rises when your semester GPA is above it. At the crossover, your cumulative GPA stops falling and starts rising — that’s the minimum of $A T C$ .

Worked Example

Using the pizza shop data ( $F C = 3, 000$ dollars):

$q$	$T C$
0	3,000
100	4,500
200	5,500
300	7,000
400	9,500

Calculate $M C$ , $A T C$ , and $A V C$ between each output level.

Check yourself · no marks

Why does the gap between $A T C$ and $A V C$ get smaller as output increases?

Commit to one first. Guessing and being wrong beats reading the answer cold.

Practice · 1 / 4

No penalty for a wrong answer

Test your understanding of average and marginal cost:

A firm’s $T C = 10, 000$ dollars at $q = 200$ units. $A T C$ is:

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