Average Total Cost vs Marginal Cost
Average Total Cost and Marginal Cost are two Production & Costs concepts in AP Economics that students often mix up. Average Total Cost is the total cost per unit of output produced. Marginal Cost is the additional cost incurred by producing one more unit of output. Here is how they compare side by side.
It is found by dividing total cost by the quantity of output. Average total cost includes both average fixed and average variable costs and typically forms a U-shaped curve due to spreading fixed costs and diminishing returns.
It is calculated as the change in total cost divided by the change in quantity. Marginal cost typically decreases at first due to increasing marginal returns, then rises due to diminishing returns.
ATC vs MC: The Average and the Next One
| Average total cost | Marginal cost | |
|---|---|---|
| Definition | Total cost divided by quantity | The addition to total cost from one more unit |
| Answers | What does a typical unit cost? | What does the NEXT unit cost? |
| Shape | U-shaped | U-shaped, but falls and rises sooner |
| Includes fixed costs | Yes | No. Fixed costs do not change with output |
| Where they cross | MC cuts ATC at ATC's minimum | Same point, and it is not a coincidence |
| Used for | Judging profit or loss per unit | Choosing the profit-maximising quantity |
Why marginal cost always cuts average total cost at its lowest point
This is not a drawing convention, it follows from arithmetic. Whenever the next unit costs LESS than the current average, it pulls the average down. Whenever it costs MORE, it pushes the average up. So the average is falling exactly while MC is below it, and rising exactly while MC is above it, which means the average must be at its minimum at the moment MC crosses it. The classic analogy is a test average: a score below your average drags it down, one above lifts it. If a graph shows MC crossing ATC anywhere other than the bottom of the U, the graph is wrong.
Marginal cost ignores fixed costs entirely
Fixed costs do not change when output changes, so they contribute nothing to the cost of the next unit. Marginal cost is therefore driven purely by variable costs, which is why MC cuts average variable cost at ITS minimum too, and does so at a lower quantity than where it cuts ATC. That gap exists because ATC carries the falling average fixed cost on its back, which keeps pulling ATC down after AVC has already started rising. Being able to explain why the two minimum points differ is a reliable way to show real understanding on a free-response question.
Each answers a different question, and mixing them costs points
Marginal cost decides HOW MUCH to produce: set MC equal to marginal revenue. Average total cost decides WHETHER the chosen quantity is profitable: compare price to ATC at that quantity, and the vertical gap times quantity is total profit or loss. Students who try to find the profit-maximising quantity where price equals ATC get the wrong answer, and students who compute profit using marginal cost get the wrong number. Do the two steps in order and label which curve you are reading. See /glossary/compare/marginal-cost-vs-marginal-revenue for the first step.
Frequently asked questions
Why does the marginal cost curve intersect ATC at its minimum?
Because a value below an average pulls the average down and a value above it pushes the average up. ATC falls while MC is below it and rises while MC is above it, so ATC must be at its lowest exactly where MC crosses. The same logic puts the MC and AVC intersection at AVC's minimum.
Does marginal cost include fixed costs?
No. Fixed costs do not change when output changes, so they add nothing to the cost of producing one more unit. Marginal cost reflects variable costs only, which is why it can be below average total cost even when the firm is losing money overall.
How do you calculate profit using ATC?
Find the profit-maximising quantity where marginal revenue equals marginal cost, then go straight up from that quantity to the demand curve facing the firm to read the price, and read average total cost at that same quantity. Profit per unit is price minus ATC, and total profit is that difference multiplied by the quantity. A negative difference is a loss per unit.
Live Production Costs graph. Drag the curves, or open the full version.
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