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Economics/Average Total Cost (ATC) vs. Marginal Cost (MC)


QUESTION: ATC is U-shaped.Intially this curve tends to fall and after reaching minimum point,it begins to rise.

ANSWER: Great, Hemlata. We're almost there. . .although I wish you had chosen 'Reply to this Question' rather than providing your answers in the form of a new question - that will make it VERY HARD for people in the future to learn anything.

Now let me ask two questions:

#4: Why does the ATC curve fall initially?

#5: Why does the ATC curve then begin to rise "after reaching (its) minimum point?


---------- FOLLOW-UP ----------

QUESTION: ATC falls intially because of increasing returns to a factor.It is due to Law of variable states that intially MP(Marginal product) of variable factor tends to rise.It means more of output per every additional unit of L[let labour(L) be variable factor].it implies an increase in will find that ultimately it means cost of the variable factor(L) per unit of output(AVC) tends to fall.Exactly opposite in the situation when diminishing returns are in operation.A.C=AVC+AFC.AFC falls as output increases.
Thus,intially falling AFC combines with falling AVC to cause falling AC.The extent of falling of AFC tends to be very small so that it no longer obstructs the pace of rising AC(due to rising AVC) to some extent.
Conclusion- AC (along with AVC) tends to be U-Shaped in accordance with the law of variable proportions.
And I want to inform you that last time in your website the option of 'follow up question' was not,i choose to ask question separately.

ANSWER: Hemlata, I do not answer questions that are marked 'Private'. Had you read  my profile on, you'd know that. Obviously you don't understand--or you choose to ignore--the economic implications that your choice imposes on me: It sets me up to have to respond to the same questions from other people. Inasmuch as I'm an unpaid volunteer, I wouldn't be much of an expert in economics if I allowed myself to have my time--which is my inventory--squandered by an absolute stranger like you, would I?

Therefore, here's the deal: Either you agree to make this conversation public, or we're done. Take your pick, please: Which do you prefer?


---------- FOLLOW-UP ----------

QUESTION: I had not marked my question as 'private'.plz clear your misunderstanding.I also want to make the question public so that users can get benefitted from it.
Anyway,i request you to answer my question as soon as possible.

Thank you, Hemlata. I was flabbergasted when the question came in showing Private: Yes . Glad we're on the same page here.

Now, as you rightly described, the ATC curve is U-shaped. On the left side, MC < ATC, so the curve is downward-sloping. On the right side, it's just the opposite. Therefore, in order for MC = ATC to occur, the MC line must intersect the ATC curve at the latter's lowest point. Otherwise, ATC will be either rising or falling, won't it?

If this doesn't make sense, please reply and tell me what's not making sense. I will try to make it clearer. . .although, to be honest, I'll have a hard time doing that. But I'll certainly try.

If this all does make sense, however, please do me the favor of completing the rate-the-expert e-mail you'll receive on the heels of this reply. Your ratings--and, especially, your comments--help me do a better job of helping folks like you who ask such interesting questions!

Take care, and please post again any time. And thank you for persevering through this Socratic process. I hope you learn more--much more--than you would have learned had I just answered your question.

All the best--

Warren Miller, CFA, CPA


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Warren D. Miller, CFA, CPA, ASA


My expertise in economics is limited to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Questions dealing with macroeconomics and other sub-disciplines of the subject should be submitted to those who have the appropriate expertise. N.B.: I DO NOT ANSWER QUESTIONS MARKED 'PRIVATE' because I believe that knowledge should not be hoarded. I also believe that such questions are likely to come those trying to cheat. Also, as one who was a full-time academic for half a decade, I can recognize test/homework questions several time zones away. Do not demean yourself by submitting such questions to me. Those who do so are cheating; I WILL call you out publicly. I have a zero-tolerance policy for cheating and dishonesty. In addition, please don't emulate the businessman who posted a request for help in August 2008. He expressly denied that he was seeking "investment advice" and said that his query was for, and I quote, "educational and informational purposes." Later, he allowed as how his questions related to the possible purchase of a $500K piece of equipment. I said I thought he had misrepresented himself. Bottom line: high-end business consulting is how I make my living. I am the sole support for my family. Please respect that fact and don't try to get for free what our clients pay for. If your company is big enough to have a sophisticated problem, it can afford to pay for the expert advice we and others provide. Beckmill Research, LLC, is a 95-octane firm. We're small, but we've been at this for nearly 20 years. We know what we're doing. Segue: Early on, some asked me for career advice; I gave it. I now get many such requests. The demand for a valuable good that is free is unlimited, so I now charge for that advice. Email me: Finally, PLEASE DO NOT ASK FOR INVESTMENT ADVICE. I am not licensed to provide such advice. If you want such counsel, talk to your financial planner or other financial adviser.


I work with Austrian economics (which differs in major respects from the traditional economics), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) every day in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and solutions to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.

CFA Institute, Strategic Management Society, American Society of Appraisers, Academy of Management, Culver Legion, National Association of Scholars.

CFA Magazine, Strategic Finance, Valuation Strategies, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, Business Valuation Review, among others

Chartered Financial Analyst designation (2006); Accredited Senior Appraiser in Business Valuation (2006); Certified Public Accountant (1992); MBA - Oklahoma State University (1991); Completed all of my Ph.D. coursework in strategic management - Oklahoma State University (1983-87); BBA in finance and accounting - U. of Oklahoma (1975)

Awards and Honors
Business Valuation Volunteer of the Year (2001) - American Institute of CPAs; Winner - Oklahoma Humorous-Speaking Contest - Toastmasters International (1971)

Past/Present Clients
Names are confidential. However, the "sweet spot" of our target market is companies that are too big to be small and too small to be big. Usually, those are companies with employees in the 15-to-100 range. At the low end of that range is where companies can first take advantage of the specialization of labor. However, having everyone do everything is a tough habit for many--most, I would argue--small enterprises. That is why they not only remain small, but also fail to survive beyond a second generation. Only 5% (one in twenty) companies make it to the third generation of ownership.

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