What is the relationship between average cost and marginal cost?

A company's basic average cost and marginal cost are very different concepts, but they work together and fluctuate up and down according to how the other cost increases or decreases. Average cost can be described as the ratio of total cost to the total number of goods sold. It is equal to the total cost of goods sold divided by the number of items sold. It has a very strong relationship with the supply and demand curves. Average cost can also be described as the sum of average variable costs and average fixed costs. On the other hand, marginal cost is the cost incurred due to an additional unit or product. Average cost and marginal cost are interrelated because when marginal cost increases or decreases, average cost also fluctuates.

The average cost is different from the actual price because it depends on the general relationship between supply and demand. In some situations, price may be lower than average cost, depending on marginal cost. Marginal cost is the variable cost of producing an additional unit. When it is greater than average cost, then marginal cost pulls the average up. If it is less than average cost, then marginal cost pushes average cost down. These are the relationships between these two entities. When average cost and marginal cost have the same value, average cost remains constant without any change.

If the average cost increases with increasing earnings, then the company has an increasing cost. Expenses would increase as administrative costs and staff coordination become difficult and complex. On the other hand, if average costs decrease over time while production increases, costs would decrease. This can be done by adding more experts in the employee category and implementing custom plans. The supply curve is very important considering the relationship between average cost and marginal cost. An organization's supply curve can be thought of as the part of the marginal cost curve that is above average variable cost.

Average cost and marginal cost are related to each other. Marginal cost always changes the parameter as it can fluctuate with changes in production. It is the ratio of the change in total cost to the change in production. Average total cost decreases at first, but then increases as a general behavior. It depends on the average variable costs and the average fixed costs as it is the sum of them. If average variable cost increases, average total cost can increase, but only when average variable cost is greater than average fixed cost. The average cost will also not increase even if the average variable cost rises sharply, which could be due to the rapid decline in the average fixed cost.

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