Relationship between AVC and MC:

The relationship between AVC and MC curves is similar to that of AC and MC.

i. Both AVC and MC are derived from total variable cost (TVC). AVC refers to TVC per unit of output and MC is the addition to TVC, when one more unit of output is produced.

ii. Both AVC and MC curves are U-shaped due to the Law of Variable Proportions.

The relationship between AVC and MC can be better illustrated with the help of following schedule and diagram.

1. When MC is less than AVC, AVC falls with increase in the output, i.e. till 2 units of output.

2 When MC is equal to AVC, i.e. when MC and AVC curves intersect each other at point B), AVC is constant and at its minimum point (at 3rd unit of output).

3. When MG is more than AVC, AVC rises with increase in output, i.e. from 4 units of output.

4. Thereafter, both AVC and MC rise, but MC increases at a faster rate as compared to AVC. As a result, MC curve is steeper as compared to AVC curve.