Next question, why does

the average variable cost curve approach the average total cost curve?

Of course, because as average fixed costs fall this must be the case.

As for the hardest question,

why is the marginal cost curve MC intersect

both the AVC and AC curves at their minimums?

First, let's refresh your memories as to why the ATC,

AVC and MC curves slope first down and then up.

It's the law of diminishing returns, right?

As for why the MC curve intersects both the AVC and AC curves at their minimums,

the answer lies in these key formulas.

If marginal cost is greater than average total cost then

the ATC must be rising and if marginal cost is less than ATC,

then average total cost must be falling.

Figure it this way.

If the production of an additional unit has a marginal cost greater than average cost,

then the production of that unit must drive the average up and conversely.

Here's the punchline.

It must be that only when marginal cost equals average total cost that the ATC

is at its lowest point.

Now check this out.

This is a very critical relationship.

It means that a firm searching for

the lowest average cost of production should always look

for the level of output at which marginal cost equals average cost.

To better understand this relationship,

study the curves in this figure for a moment.

Note that there is a small range Area B,

where average cost is falling and average variable cost is rising.

Why is this important?

Simply because when we wedge the concept of marginal cost,

with the concept of marginal revenue,

and we will do so in the next lesson.

You will see that the firm is then able to determine if it is

profitable to expand or contract its production level.

In fact, the analysis in the next several lessons will

center on precisely these types of marginal calculations.

That's why learning these nuts and bolts concepts now is so

important and that completes our exploration of short run cost analysis.

So, when you are ready,

please move on to the next module in long run cost analysis.