Marginal cost curve

[siidheart]

Q1. Marginal cost curve (MC) has a J-shape because MC declines over lower production quantities„ and “minimum points of Average total cost curve and Average variable cost curve are not the same”…. What is the link between minimum points of ATC/AVC and MC? How does the J-shape depend upon the second reason?
Q2. MC curve about AVC is firm’s short run supply curve in a perfectly competitive market. Explanation?

 

[S2000magician]

Suppose that the average of a bunch of numbers is 10. If the next number you add to the list is 11, the average of the new bunch will be greater than 10; if the next number you add to the list is 9, the average of the new bunch will be less than 10.
Thus, if the marginal whatever curve is above the average whatever curve, the average whatever is increasing; if the marginal whatever curve is below the average whatever curve, the average whatever curve is decreasing. Furthermore. at a maximum value on the average whatever curve – where it is neither increasing nor decreasing – the marginal whatever curve crosses the average whatever curve from above to below; at a minimum value on the average whatever curve – where it is neither increasing nor decreasing – the marginal whatever curve crosses the average whatever curve from below to above.
All of this is true whatever whatever is. In this case, whatever is cost: when marginal cost is below average (total or variable) cost, total cost is decreasing, and when marginal cost is above average (total or variable) cost, total cost is increasing. Marginal cost equals average (total or variable) cost at the minimum point on the average (total or variable, respectively) cost curve.

 

[freecfa]

Q1. The relationship between MC, ATC and AVC is that while MC decreases the others decrease and when MC increases the others increase. The MC curve intersects the ATC and AVC curves at their where ATC and AVC is at its minimum.
The reason for the ‘J’ or ‘U’ shaped curves is deminishing returns to labour. As capital is fixed in the short term there is a point at which adding more labour does not achieve higher output thus increasing MC, AVC and ATC.
Q2. This is because at every point on the MC curve above the AVC the MR will exceed AVC and so, in the short run the firm will continue to produce. In a perfectly competitive market the MR curve is the market price and so will be a horizontal line.
Hope this helps

 

[S2000magician]

freecfa wrote:Q1. The relationship between MC, ATC and AVC is that while MC decreases the others decrease and when MC increases the others increase.

Whether marginal cost is decreasing or increasing isn’t relevant. What’s relevant is whether marginal cost is above or below average cost.

freecfa wrote:The reason for the ‘J’ or ‘U’ shaped curves is deminishing returns to labour. As capital is fixed in the short term there is a point at which adding more labour does not achieve higher output thus increasing MC, AVC and ATC.

It isn’t that more labor doesn’t produce higher output, it’s that even if more labor produces higher output, it does so at a slower rate.

freecfa wrote:Q2. This is because at every point on the MC curve above the AVC the MR will exceed AVC and so, in the short run the firm will continue to produce. In a perfectly competitive market the MR curve is the market price and so will be a horizontal line.

Whether marginal cost is above or below average variable cost has nothing to do with whether marginal revenue is above or below average variable cost.
The reason that the supply curve is the marginal cost curve above average variable cost is that, in the short run, if you can sell at a price above average variable cost, then you’re covering all of your variable costs plus some portion of your fixed costs; if you stop production, you’re covering none of your fixed costs. Thus, even though you may be losing money, you’re losing less by producing than by shutting down.

freecfa wrote:Hope this helps

Given that all of your answers were wrong, it’s hard to imagine how it would help.

 

[freecfa]

Q1. You’re right this is incorrect and you are correct, my apologies.
Q2. So you’re saying that where capital is fixed there isn’t a point where adding more labour will produce no new output?? Any that the shape of the MC cureve isn’t due to dininishing returns to labour?
Q3 For a company to produce the MR has to at least exceed AVC, I take it you agree with this? The MR curve for a company ina perfectly competitive industry the MR curve is the market price and so a horizontal line. If the MR curve intersects the MC curve at any point above AVC, MR>AVC and even though it may be making a loss it will keep producing for the reasons you give above. This is the reason that the portion of the MC curve above AVC is the supply curve for a company in a perfectly competitive market. Which is pretty much what I said before.
I do not believe all my answers are wrong, but I’ll give you one of three.

 

[S2000magician]

freecfa wrote:Q2. So you’re saying that where capital is fixed there isn’t a point where adding more labour will produce no new output?? Any that the shape of the MC cureve isn’t due to dininishing returns to labour?

If you read what I wrote you’ll see that I wrote nothing of the sort. What I wrote is that diminishing product needn’t imply negative marginal product. The marginal cost curve is U-shaped because of diminishing marginal product, not because of negative marginal product.

freecfa wrote:Q3 For a company to produce the MR has to at least exceed AVC, I take it you agree with this?

Of course. But its marginal cost curve doesn’t depend on marginal revenue. If its marginal cost curve is completely above the marginal revenue, the company will stop producing. But that doesn’t change its marginal cost curve.

freecfa wrote:I do not believe all my answers are wrong, but I’ll give you one of three.

Believe what you will. However, you’re not “giving” me anything: the facts speak for themselves.