Average costAverage cost is the sum of average fixed cost and average variable cost. At low output levels, average fixed cost is quite large because the rental cost of capital assets is spread over only a few units of output. Hence, at low output levels, average cost is substantially greater than average variable cost.

On the other hand, when output is large, average fixed cost is relatively small. When output is large, average cost and average variable cost are nearly the same because fixed cost is spread over many units of outputs and fixed cost per unit is very small. This gives average cost the shape.

Marginal cost is the change is cost per unit change in output. The preceding story, which analyzes the shape of the average variable cost curve, also explains the shape of the marginal cost curve drawn. At low output levels, additional workers are very productive and the cost of an additional unit of output is relatively small. The marginal cost curve declines when output rises from low levels and the work force approaches the most efficient size for the capital stock. When the point of diminishing marginal productivity is reached, the marginal cost curve begins to rise.