Average Cost  

Average cost is the total Cost divided by Quantity. AC= TC/Q

Short Run Average cost curves tend to be U shaped because of the law of diminishing returns.

In the short run, capital is fixed, initially marginal cost falls until diminishing returns set in. After this point, marginal cost starts to rise rapidly and so average costs start to rise as well.

Diagram of Average cost with Marginal Cost

costs

 

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