Final answer:
When the average cost for a competitive firm is decreasing, the marginal cost must be less than the average cost. This happens when the firm is still within economies of scale, meaning producing more will lower the average cost further. The relationship between the quantity at the minimum of the LRAC and market demand helps predict the number of competitors in the market.
Step-by-step explanation:
In terms of the relation between the average cost (ac) and marginal cost (mc) curves: when average cost is decreasing in quantity for a competitive firm, the marginal cost must be less than the average cost. Since the average cost curve is the average of all costs up to a certain quantity of output, if marginal cost—the cost of producing one more unit—were higher than the average, it would pull the average up. Thus, for the average cost to be decreasing, each additional unit (marginal unit) must cost less than the average cost up to that point. This indicates that the firm is within the scale of economies and increasing output would lead to lower average costs.
When considering competitive markets, if the quantity demanded in the market is much greater than the quantity at the minimum point of the long-run average cost curve (LRAC), then a market with many firms competing is expected. Conversely, if the quantity demanded is less than the quantity at the minimum of the LRAC, a single producer or monopoly is more likely.