Why is the short-run-Average cost curve ‘U’ – Shaped ?


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The short-run-average cost is always in U-shape.  In the other words it falls downward initially and reached  on its minimum point.  After that it begins to rise (increase).  The shape of short-run-average cost can be explained in two ways given as under as per the table and figure:-

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Capital

Unit of output

Total cost Marginal cost Average cost  = total cost / unit of out
1

20

20

20

2

28

8

14

3

34

6

11.3

4

38

4

9.5

5

42

4

8.4

6

48

6

8.0

7

56

8

8.0

8

72

16

9.0

9

99

27

11.0

10       120

31

12

 

 

 

 

The Short-Run Cost – average cost always in the shape of “U”  by the reasons given as under  on the basis of table:
Short-run-Average cost is the aggregate of average fixed cost and average variable cost.  As the production increases average costs goes falls down upto its initial stage or its minimum point of production i.e. Average cost is falling at the minimum point.  A firm is making full use of its production capacity.  If a firm is on its initial point.  After that the owner of a firm or industry could not run his business. He will shut his business.

Marginal cost effects the average cost :-  The law of cost of variable proportion is fully accepted in this situation.  The marginal cost is also increasing and decreasing as well as the average cost  increasing or decreasing respectively.  There is combination of marginal and average cost.  The marginal cost curve always cut the average cost curve from below, which the equilibrium point of the firm or a industry.

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