It should be noted that average and marginal costs are related together. This relationship should be carefully understood.

When the average cost is falling, the marginal cost is less than the average cost and when average cost is rising, the marginal cost is higher than the average cost.

But if marginal cost neither goes up nor comes down, the average and marginal costs are equal.

In the table, up to 5th unit average cost is falling, it will be seen from the fourth column that from second to fifth unit of output marginal cost is less than its corresponding average cost. from 6th to 10th unit average cost is rising. It will be seen from the table that marginal cost is higher than average cost in this range.

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A simple arithmetical illustration will bring out Cleary the average – marginal relationship. Suppose a cricket player’s batting average is 50. If in the next match, he scores less than 50, say 45, his batting average will decrease, because his additional (i.e., marginal) score (45) is less than his average score (50).

But, if in the next match, he scores more than the average (50), say 60, his average will go up for the obvious reason that this new or additional (i.e., marginal score 60) is higher than his average score (50). We, therefore, conclude that if the marginal is rising, the average goes up, and if the marginal is falling, the average goes down. When, however, the marginal remains unchanged, the average and marginal are equal.

The following diagram (23.2) illustrates the average-marginal cost relation­ship:

In this figure (23.2), A represents the average cost and M represents the marginal cost. It can be clearly seen that when marginal cost (M) is above the average cost (A), the average cost rises which is shown by the rising arrow. On the other hand, when the marginal cost (M) is below the average cost (A), then the average cost falls, as is shown by the falling arrow. But when the marginal cost is the same as the average cost (i.e., AM), the average cost remains constant, as if M is pulling A along horizontally.Average-Marginal Relationship