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It is generally believed by economists that the long-run average cost curve is normally U shaped, that is, the long-run average cost curve first declines as output is increased and then beyond a certain point it rises.
The following article will guide you to know why cost curve is “U” shaped. The addition of fixed and Variable Cost gives us total costs, which when divided by the output give us Average Costs in the short period.
- Diagram of Marginal Cost
- Average Cost Curves
- Long Run Cost Curves
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.
ATC (Average Total Cost) = Total Cost / quantityAVC (Average Variable Cost) = Variable cost / QuantityAFC (Average Fixed Cost) = Fixed cost / QuantityThe 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. Fo...
- Choice of Production Technology. A firm can perform many tasks with a range of combinations of labor and physical capital. For example, a firm can have human beings answering phones and taking messages, or it can invest in an automated voicemail system.
- Economies of Scale. Once a firm has determined the least costly production technology, it can consider the optimal scale of production, or quantity of output to produce.
- Shapes of Long-Run Average Cost Curves. While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve.
- The Size and Number of Firms in an Industry. The shape of the long-run average cost curve has implications for how many firms will compete in an industry, and whether the firms in an industry have many different sizes, or tend to be the same size.
The long-run average cost (LRAC) curve shows the lowest cost for producing each quantity of output when fixed costs can vary, and so it is formed by the bottom edge of the family of SRAC curves. If a firm wished to produce quantity Q 3 , it would choose the fixed costs associated with SRAC 3 .
Mar 20, 2019 · Cost curves are graphs of how a firm’s costs change with change in output. Economists draw separate curves for short-run and long-run because firms have higher flexibility in selecting their inputs in the long-run.
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Why does a long run average cost curve have a U-shape? From Fig. 2, you can see that the LAC curve (long run average cost curve) is a U-shaped curve. This shape depends on the returns to scale.
