Readers Question Economists describe both short run and long run average cost curves as u shaped. Provide a brief explanation why each of these curves might be considered u shaped.
Short Run Cost curves are U shaped because of diminishing returns.
In the short run capital is fixed. After a certain point, increasing extra workers leads to declining productivity. Therefore, as you employ more workers the Marginal Cost increases.
Diagram of Marginal Cost
Because the short run Marginal cost curve is sloped like this, mathematically the average cost curve will be U shaped. Initially average costs fall. But, when marginal cost is above the average cost, then average cost starts to rise.
Marginal cost always passes through the lowest point of the average cost curve.
Average Cost Curves
- ATC (Average Total Cost) = Total Cost / quantity
- AVC (Average Variable Cost) = Variable cost / Quantity
- AFC (Average Fixed Cost) = Fixed cost / Quantity
Costs
- Note FC (fixed costs) remain constant. Therefore the more you produce, the lower the average fixed costs will be.
- To work out Marginal cost, you just see how much TC has increased by.
- For example, the first unit sees TC increase from 1,000 to 1,200 (therefore the increase (MC) is 200)
- For the second unit, TC increases from 1,200 to 1,300 (therefore the increase MC is 100)
Long Run Cost Curves
The long run cost curves are u shaped for different reasons. It is due to economies of scale and diseconomies of scale. If a firm has high fixed costs, increasing output will lead to lower average costs.
However, after a certain output, a firm may experience diseconomies of scale. This occurs where increased output leads to higher average costs. For example, in a big firm it is more difficult to communicate and coordinate workers.
Diagram for Economies and Diseconomies of Scale
Note however, not all firms will experience diseconomies of scale. It is possible the LRAC could just be downward sloping.
Related
- Diagram of Monopoly
- Diagram of Perfect competition
I understood the Cost Curves better after reading this article .Keep up the good work ; From Kenya
these diagram cleared all of my doubts in short run& in long run
Marginal fixed cost is the total fixed cost at one unit of output and is nil for all higher units of output. Average fixed cost is also the total fixed cost at one unit of output but declines in the form of a hyperbola for all higher units of output. Marginal variable costs are the same as average variable costs. Cost accountants have been quicker than economists to recognise this. The U shaped cost curve with its declining marginal curve is economically unrealistic as well as being superfluous. All these marginal and average curves can be shown on the same coordinates diagram.
That was super intelligence that I’ve just discovered, thanks to these points I now understand cost curves
Great website but Can you please mark contents with as and a2 level
brief explanation for some chapters
thanks for simplified explanation
i like this define
very brief and to the point definition I like it.
Thanks
omg this is great!!! i cn finaly find the curve on my nose !! =D ps: im an ugly bitch =D
I clearly understood the points plus their illustrations
Uganda Management Institue
Kampala,Uganda.
Am really looking for a place to develop and advance my career as an Economist
This reminds of my elementary economics at high school.THANKS
i like the brief notes
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thanks it really useful information
are those the onli cost curves, are there more cost curves and can u describe them plz
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to the point answer.
fenk yuew for infermetieon
VERY GOOD DEFINITION IN THE FEWEST WORDS.
examples was very good.
i also like the definitions.
thanks