Draw MC as the Nike tick first, then bring AVC and ATC through its lowest point.
On 1 April 2026 the National Living Wage for workers aged 21 and over rose from £12.21 to £12.71 an hour. The Association of Convenience Stores said the wage and employer National Insurance rises of 2025 had already led shops to accept lower profits, raise prices or cut staff hours. A shop’s wage bill changes with how many hours it opens and how much it sells. Its rent and business rates do not.
So which of a shop’s costs does a wage rise change: the cost of the next unit it sells, or only its average cost?
Source: Association of Convenience Stores, on the Low Pay Commission recommendation (25 November 2025).
A café takes on more staff, but keeps the same kitchen and the same two coffee machines.
As it adds more and more staff, what happens to the extra coffees each new worker makes?
The first few staff can specialise, so each adds more than the last. But with only two machines, extra staff soon get in each other’s way, and each adds less than the one before: diminishing marginal returns. That is why the marginal cost of a coffee first falls, then rises.
Start with the assumptions. In the short run at least one factor of production is fixed, such as the size of the shop or the number of machines. Fixed costs, like rent and business rates, do not change with output. Variable costs, like wages and stock, do. Total cost is fixed cost plus variable cost.
Check: Which of these is a fixed cost for a café in the short run?
Rent has to be paid whatever the café sells. Milk, beans and hourly wages all rise and fall with output.
Draw MC first, as a tick: it falls, then rises. At first each extra worker adds more output than the last: staff can specialise, and the fixed machines are not yet fully used. So each extra unit costs less to make. Then the fixed kitchen gets crowded. Each extra worker adds less than the one before, so each extra unit needs more labour, and MC rises. MC is the mirror image of marginal product: as the extra output from each worker rises, MC falls, and as it falls, MC rises.
Check: Why does a firm’s MC curve rise in the short run?
Diminishing returns is a short-run idea, because one factor is fixed. Diseconomies of scale belong to the long run, when every factor can change.
Now AVC. Bring it down to MC and through MC’s rising part at AVC’s lowest point. This is make or break. While MC is below AVC, each extra unit costs less than the average and pulls it down. The moment MC rises above AVC, each extra unit pulls the average up. So MC cuts AVC at its lowest point, and AVC turns up straight after.
Teacher tip: Draw MC first, then bring each average down to meet it. If you draw the U shapes first, MC rarely ends up passing through their lowest points.
Check: MC is below AVC. As output rises, what happens to AVC?
If the next unit costs less than the average, adding it pulls the average down, just as a test mark below your average pulls your average down.
Then ATC, above AVC. The same rule: MC cuts ATC at its lowest point, and ATC turns up once MC is above it. ATC’s lowest point is to the right of AVC’s, because fixed cost is still being spread more thinly as output rises.
The gap between ATC and AVC is average fixed cost. The same fixed cost is spread over more and more units, so the gap narrows as output rises, but it never closes.
Check: Why do ATC and AVC get closer together as output rises?
ATC = AVC + AFC. Total fixed cost stays the same, so AFC = TFC ÷ Q falls as Q rises.
Now the shop’s business rates rise: a fixed cost. AFC rises at every output, so ATC shifts up to ATC2. MC and AVC do not move, because the cost of making one more unit has not changed.
Teacher tip: ATC2 still has its lowest point on MC, so that lowest point moves up and to the right, not straight up.
Now the wage rise: a variable cost. Every unit now costs more to make, so MC, AVC and ATC all shift up. That is the National Living Wage rise for a shop that pays its staff by the hour.
Check: Which of these changes shifts the MC curve?
Only a change in variable cost changes the cost of the next unit. Rent, rates and one-off fees are fixed costs: they shift ATC only.
Areas. At Q1, total variable cost is AVC × Q1: the rectangle from the output axis up to AVC. Total fixed cost is the strip between AVC and ATC. Together they make total cost, ATC × Q1. So to shade total variable cost, start at the axis.
Their MC cuts ATC on its rising part, to the right of its lowest point, and misses the lowest point of AVC altogether. MC must cut AVC and ATC at their lowest points: while MC is below an average it pulls it down, and once it is above, it pulls it up.
Explain why a firm’s short-run marginal cost curve rises, and why it cuts average cost at its lowest point.
In the short run at least one factor of production, such as a firm’s premises or machinery, is fixed. To produce more, the firm adds more of a variable factor, usually labour.
At first each extra worker may add more output than the last, as workers specialise, so marginal cost falls. But as more workers share the same fixed capital, diminishing marginal returns set in: each extra worker adds less output than the one before. Each extra unit of output then needs more labour, so the marginal cost of producing it rises.
MC cuts AVC and ATC at their lowest points because of the link between marginal and average. When the cost of the next unit is below the average, producing it pulls the average down. When it is above the average, it pulls the average up. So the average falls while MC is below it, rises once MC is above it, and is at its lowest exactly where MC crosses it.
Source: Association of Convenience Stores (November 2025). Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.