The value of MC is determined by the degree of slope of the TC curve (see Figure 5.5).
TC increases at a decreasing rate up to point a and MC therefore falls as additional units
can be produced at less cost per unit. After point a, TC increases at an increasing rate
and MC increases. Additional units now cost increasingly more to produce.
From our previous analysis (see MP above), the value of MC can be approximated by
measuring the slope of a tangent drawn to the TC curve at each point. MC is therefore
minimised at point a, the point of inflection of the TC curve, corresponding to an
output of Q1. As only variable costs change in the short run, a change in total costs is
equivalent to a change in variable costs (i.e. as noted, TC and TVC in Figure 5.5a are vertically
parallel). MC might therefore be estimated from either the TC or TVC curves. For
example, at output Q1 in Figure 5.5a, the slopes of tangents drawn to the TC curve (at
point a) and to the TVC curve (at point b) are parallel. These are also the points of
inflection of each curve;MC is therefore minimised.
Figure 5.5b shows the relationship between MC, AVC and ATC. If MC is less than
AVC, then AVC must be falling.When MC equals AVC, then AVC is at a minimum, and
once MC lies above AVC, then AVC must increase. The same relationship holds between
MC and ATC. (Note: this is the same relationship between marginal and average values
initially illustrated between average product (AP) and marginal product (MP).)
Although MC is defined as the additional cost of producing an extra unit, firms may
have difficulty in making such estimates. For example, imagine estimating the cost of
producing an extra ball bearing when thousands might be produced in a given shift.
Therefore, in practice, we commonly talk of incremental increases in production and
the corresponding ‘incremental increase in cost’. This requires estimating the additional
production costs associated with producing an extra ‘batch’ of production, for example,
an extra thousand ball bearings. Nevertheless, although we may distinguish between
incremental cost and marginal cost, our basic marginal analysis remains in place.