Question

# Why is Average Cost Curve U-shaped?

Solution

## In short run, Average Cost Curves are of U - shape. It means, in the beginning it falls and after reaching the minimum point it starts rising upward. It gets U - shape due to the following reasons (i) On the Basis of AFC and AVC In the short run, since AC = AFC + AVC. Therefore, the behaviour of AC curve directly depends upon the behaviour Of AFC and AVC crores. AC curve is obtained by adding AFC and AVC curves and as a result AC curve gets U - shape. (ii) On the Basis of the Law of Variable Proportions The U -shape of average cost curve can also be expalined through the law of variable proportions. In the beginning with increase in output, average cost falls because of the operation of the law of increasing returns. After reaching the minimum point, when we increase the output, average cost starts increasing because of the operation of the law of diminishing returns. Thus due to the law of variable proportions, the AC curve takes U -shape. (iii) On the Basis of Indivisibilities of the Factor The U-shape of AC curve is also due to the indivisibilities of the factor of production. In the short run, when a firm increase the output, due to indivisibilities of some fixed factors of production, it enjoy certain internal economies. These economies result in the fall of AC curve in the beginning. The firm generally enjoys three types of economies: technical economy, which help to bring down the AC curve. After the optimum point, with increase in output, the economies are overweighted by the diseconomies which result the AC curve to increase. Thus AC curve gets U-shaped.

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