why is short run average cost curve u shaped

why is short run average cost curve u shaped

Short Run Average cost curve is U shaped. When we see in the figure that It initially falls downwards and has reached its minimum point And after it begins to rise upward.

However, the U shaped short run Average Cost Curve can be understood in two ways as under.

1. Interaction of average Fixed Cost and Average Variable Cost
2. Application of the law of variable proportions

1. Interaction of average Fixed Cost and Average Variable Cost

Average cost involves the both cost as Average Cost = Average Fixed Costs + Average Variable Costs.

Thus, when production increases, average fixed cost and variable costs goes on falling.

Then it reaches its minimum points.

It can be understand with the help of following figure.

It is the minimum point ‘A’. Upto which average cost is falling. Here firm use full of its capacity of production. Here firm also having optimum output.

If firm produce beyond this point, where Average fixed cost will fall But variable cost will begin to rise.

Then Average cost will also increase with the increasing of variable average cost.

Then Net effect is reflected in the Upward rising AC Curve.

Conclusion:- Thus, initially Average Fixed cost and Variable cost falls and after reaching minimum again it begins to rise. So we can know why is short run average cost curve u shaped.

2. Application of the law of variables proportions :-

However, this can be understand from the following figure

As point A shows the Increasing return and diminishing costs.

• This situation exists for some time, after that law of constant return and constant costs.
• This situation is reflected at point ‘A’. Where average unit cost is minimum and output is optimum.
•  After it Diminishing returns or increasing costs sets in. 
• So after the law of diminishing return or increasing costs, the Average cost curve moves upward after point ‘A’.

Conclusion:-  In short, the U shaped average cost curve is in accordance with the return to a factor. As the average cost curve tends to decline because of increasing returns. After It tends to constant return and costs and finally it begins to rise because of diminishing returns. As we know why is short run average cost curve u shaped

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Important question of Economics

Relations Between Average Cost and Marginal Cost