All right, guys. Now I want to help you build a little intuition about marginal cost and average cost, right? How are they related? Let's check it out. So what we're going to see is that the average cost is going to rise or fall depending on the marginal cost of the next unit, alright? So if we consider the marginal cost, that's going to be the driving force of the average cost, right? It's going to be what drives it up or down, okay? So I figured a great way to kind of bring this all together is to talk about GPAs for a second, okay? So we're going to instead of talking about costs, we'll think about your GPA, the semester GPA as your marginal GPA, right? What happens if I take one more semester of classes? And your cumulative GPA, right, from every semester, that's going to be your average GPA. Alright? So let's go ahead and see what happens in this example.

So here you go, you start freshman year in the fall, you're partying way too much and you're failing all your classes, you're not even showing up for lecture, you end up with a 1.5 GPA, yikes, right? And then in the spring you're like, you know what, I'm going to buckle down, I'm going to do a great job and you end up pumping out a 3.0 GPA right there and then sophomore year comes around and you hit that sophomore slump, right? And your grades start decreasing again and in the spring you're back down to a 1.6 right? And that point is probably where you're like, maybe I should start using Clutch, right? So here we are now and let's see what happens with these marginal GPAs and the average GPA. Right, so the average is going to be the total divided by the quantity, right? And in this situation it's going to be the quantity of semesters.

We're going to see that in the first semester your average GPA, well you've only had one semester of classes so that is your average right? The GPA that you got that first semester, that's your average GPA. Now what about after two semesters, right? In this situation, we're going to add your grades in both semesters and divide it by the number of semesters. Right? We had two semesters in this case. So it's going to be 1.5 plus 3 divided by 2 and there we go. There's our average GPA of 2.25 and that's going to be what we put in here. Right? So let's go ahead and add another semester, right? So now sophomore year started and you got a 2.8. Well to find our cumulative GPA here, we're just going to add all three semesters and divide by 3. Right? And obviously this is a simplified example, obviously GPA has to do with credit hours and all of that, but let's just keep it simple right? Every semester you're taking the same amount of credits and they're all worth the same whatever. So it's been three semesters now, so we're going to take that total of 3 and divide by 3. 1.5 + 3 + 2.8 divided by 3 and we're going to get, I'm going to round it to 2.43 right there as your GPA, and the last one is where we have one more semester right and you started slacking off again and you pulled off a 1.6.

Alright, so let's see what happens here. Now I'm going to do it up here where I have some space. We're going to add all the semesters, right? 1.5 plus 3 plus 2.8 plus 1.6 right. All the semesters and we're going to divide by 4 because that's the quantity of semesters here and let's see what that averages. We've got 1.5 plus 3 plus 2.8 plus 1.6 divided by 4 and we're going to get 2.23. I'm going to round it off there. 2.23. Alright? So there we go. We figured out what those averages are based on those marginal. So let's go ahead and see how this marginal is driving the average. Right? So let's see what happens. In this semester the marginal went up, right? And when the marginal went up we saw the average go up, right? So we had a higher marginal cost than the average cost, right? And it brought the average up. But now notice what happens in the second semester, your GPA falls a little bit, right? Between spring and fall there, your marginal GPA, right, what you did in the semester went down, right? But it's still higher than the average. Even though the marginal cost fell, this marginal cost is higher than this average, right? So the previous is only going to be driven based on the following semester's marginal. Even though the marginal decreased, you did worse this semester than last semester, our average still goes up, right? And that's because the 2.8 is bigger than the 2.25, right? This semester you did better than your average so it's going to drive the average up, alright? And last one here, we see that again your GPA dropped, right? But this time it dropped below the average, right? The average in this case was the 2.43 and you only managed to pull off a 1.6 right? So look what happens, you're going to see that the cumulative GPA drops right? So it doesn't really matter the direction the marginal cost is going, what matters is whether it's higher or lower than the average right and that's what's going to drive the average cost up or drive the average cost down. So we saw that when the marginal cost is greater than the average cost, right, your marginal GPA was greater than the average, well it's going to increase the cost when we produce another unit, right? That marginal Cosby is going to drive up the average and the opposite, right? When the marginal cost is less than average cost, it's going to decrease the average cost when we add another unit, right? So that's going to be the relationship that we see there between the marginal cost and the average cost, right? So it depends if the marginal cost is greater than or less than the average and it's going to drive it in the direction of the marginal cost, right? Cool. Let's go ahead and pause here and then we'll continue on the bottom of the page.