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Importance of Marginal Cost
Anyone that administrates a business will be interested in knowing what amount of, q, of a good they should produce in order to maximize their benefits. In order to get the answer to this, they need another concept of costs: marginal cost.
Marginal cost is the increase in the costs when an additional unit of the good is produced. The marginal cost of an additional unit of a good depends on how much of that good has been produced.
Points Where MC Curve Crosses AVC and ATC Curves
Here there is someone of an interesting thing to look at according to economy experts: if you draw the marginal costs to create a curve of marginal cost (MC), this curve crosses both the AVC as well as the ATC in their minimum points.
This would occur if the marginal cost of each unit determines the AVC and ATC curves are increasing or decreasing. Ok, so perhaps this is not that clear to understand, but we will try to simplify it for you.
Imagine that you are in a living room with ten people inside of it. Let us say that the average height of these people is of 1,74 m. now think about what happens to the average if another person walks into the living room:
If the last person to walk into the living room is taller then the average in the room, the average increases.
If the last person to walk into the living room is shower than the average, the average decreases.
If the last person to walk into the living room is the exact same height as the rest of the people in the living room, the average remains the same.
The same reasoning applies to marginal costs and average costs. After q product units, you can calculate AVC and ATC, just the same way you can calculate the average height of the first ten people that are in the living room. Then the AVC and the ATC either increase or decrease depending on the marginal cost of the next product unit, just as the average height of the people in the living room increases, it will diminish or remain constant according to the height of the next person that goes into the living room. This is the idea in other words:
If the marginal cost is under the previous average costs, the average decreases.
If the marginal cost is higher then the previous average costs, the average increases.
If the marginal cost is exactly the same as the previous average costs, the average remains the same.
Economists are very fascinated about all these types of aspects, but in reality it is only a reflection of the effect that the yield, first growing and then decreasing, have over the cost curves. The costs first diminish and then increase. And there is some point in the middle in which they are momentarily the same, frozen for an instant while they go from the transition of diminishing to increasing point. In this point the marginal cost is the same as the average costs, because the can only be stationary when the marginal cost is the same as the average cost.