The relationship between Marginal Cost and Average Cost is the same as that between any other marginal-average quantities. When marginal cost is less than average cost, average cost falls and when marginal cost is greater than average cost, average cost rises. This marginal-average relationship is a matter of mathematical truism and can be easily understood by a simple example. Suppose a producer produces a commodity at an average cost of Rs.30. If cost of producing the next one unit is Rs. 10, his average cost falls to Rs.20, Now, if he produces one unit more and his average cost falls, it means that the additional unit must have cost him less than Rs. 20

Now, if he produces one unit more and his average cost rises, it means that the additional unit raises his average cost, and then the marginal unit must have cost him more than Rs. 20. Finally, if as a result of the production of an additional unit, the average cost remains the same, the marginal unit must have cost him exactly Rs. 20. That is, marginal cost and average cost would be equal in this case.