Knowledge checkpoint: Describe, using a diagram, the relationship between marginal cost and average total cost.
When Marginal cost (MC) is less than Average total costs (ATC), the ATC falls. Conversely, when MC is greater than ATC, the ATC rises. This means if the cost of producing one more unit (the marginal cost) is below the average cost of producing all units so far, it will pull the average cost down. On the other hand, if the marginal cost is higher than the average cost, it will push the average cost up.
To illustrate, consider an example: if the next person to enter a room is taller than the average height of people already in the room, the average height increases. If the next person is shorter than the average height, the average height decreases.
When MC equals ATC, the ATC is at its optimum point of production. This optimum point is the most technically efficient level of production. It's important to note that even if the MC is rising, the ATC can still be falling, as long as MC is less than ATC.