These two concepts will be discussed in the context of market structure and pricing. The lowest point of the AVC curve is called the shut (close)- down point and that of the ATC curve the break-even point. MC equals both AVC and ATC when these curves are at their minimum values. (4) MC first declines, reaches a minimum at Q 1, and rises thereafter. When ATC is at its minimum, MC equals ATC. (3) ATC first declines, reaches a minimum at Q 3, and rises thereafter. When AVC is at its minimum, MC equals AVC. (2) AVC first declines, reaches a minimum at Q 2and rises thereafter. Exactly the same reasoning would apply to show MC crosses ATC at the minimum point of the latter curve.

Thus MC must equal AVC at the minimum point of AVC. When MC is greater than AVC, average variable cost is rising. Thus when MC is less than AVC, average variable cost is falling.

So long as MC is above AVC, each additional unit of output adds more to total cost than AVC. If marginal cost curve lies below average variable cost curve the implication is clear: each additional unit of output adds less to total cost than the average variable cost. This result follows from the definitions of the cost curves. The marginal cost curve intersects AVC and ATC at their respective minimum points.

14.4 shows, marginal cost first declines, reaches a minimum at Q x (note that minimum marginal cost is attained at a level of output less than that at which AVC and ATC attain their minimum) and rises thereafter. Short-run marginal cost refers to the change in cost that results from a change in output when the usage of the variable factor changes.

Cost price exhale by output