011-40705070  or  
Call me
Download our Mobile App
Select Board & Class
  • Select Board
  • Select Class
 

why is the short-run average cost curve U- shaped ?

Asked by Shadab Nawaz(student) , on 2/8/12


Become Expert
Score more in Economics
Start Now with Video Lessons, Sample Papers, Revision Notes & more for Class-XII-Commerce - CBSE 

EXPERT ANSWER

The short run AC curve is a U-shaped because as output increases, AC falls and reaches a minimum point and rises beyond that. The reason behind the U-shape of AC is attributed to the law of variable proportions. In the initial stages, due to the increasing returns to a factor, the average cost falls, as marginal product of labour (MPL) is rising. However, at minimum point, owing to constant returns to labour, AC tends to stabilise and after the minimum point, as the firm is employing more units of labour with the constant unit of fixed input, the MPL falls and consequently cost rises and therefore, AC starts rising up due to higher cost at the latter stages of production due to decreasing returns to labour. Therefore, AC is ‘U-shaped’ curve.

Posted by Teena Wadhwa(MeritNation Expert)on 3/8/12

This conversation is already closed by Expert

Ask a QuestionHave a doubt? Ask our expert and get quick answers.
Show me more questions

close