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
- 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.