Average Total Cost (ATC): ATC is the total cost per unit of output.
ATC = TC/y = (TFC + TVC)/y = AFC +AVC
ATC falls sharply at the beginning of the production process because both AVC and AFC are declining. When AVC begins rising but AFC is falling steeply, then the ATC continues to fall. Then the AVC rises sharply and offsets the fall in AFC causing the ATC to fall. The shape of the ATC curve is almost u-shaped.
• Marginal Cost (MC): MC is the addition to the total cost generated by increasing production by one unit. It is the slope of the TC curve.
Mathematically, MC = ΔTC / Δy.
The behaviour of the marginal product curve determines the MC curve, which is the inverse of the former.Before to attempt to plot the cost curves, it is important to know the rules of averages and marginal quantities. According to these mathematical rules,
When MC < AC then AC decreases.
When MC > AC then AC rises.
When MC = AC then average costs are at the minimum.