Diagrams of Cost Curves

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 

MC

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

cost-curves

  • ATC (Average Total Cost) = Total Cost / quantity
  • AVC (Average Variable Cost) = Variable cost / Quantity
  • AFC (Average Fixed Cost) = Fixed cost / Quantity

Costs

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 

economies of scale

 Note however, not all firms will experience diseconomies of scale. It is possible the LRAC could just be downward sloping.

Related

25 Responses to Diagrams of Cost Curves

  1. MAKAYA November 18, 2011 at 7:13 pm #

    thanks for simplified explanation

  2. Swabuli senyonga January 28, 2012 at 11:41 am #

    brief explanation for some chapters

  3. Danial jamal March 5, 2012 at 8:25 pm #

    Great website but Can you please mark contents with as and a2 level

  4. Success Mojapelo April 22, 2012 at 10:59 pm #

    That was super intelligence that I’ve just discovered, thanks to these points I now understand cost curves

  5. Peter L. Griffiths August 27, 2012 at 3:38 pm #

    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.

  6. i got so many points while studying these diagram November 19, 2012 at 5:22 am #

    these diagram cleared all of my doubts in short run& in long run

  7. Henry Munyalo November 24, 2012 at 8:32 pm #

    I understood the Cost Curves better after reading this article .Keep up the good work ; From Kenya

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