A company over utilising its resources is incurring losses as it is producing on rising part of average cost curve. The company needs suggestions as to how can it reduce losses? Use diagram.
The point where the company is currently producing i.e. on the rising portion of AC curve, it is incurring losses due to the over-utilisation of resources. Thus, in order to minimise the losses, it should use its resources efficiently. To put in different words, it should go for optimum utilisation of resources and not their over-utilisation. This optimum utilisation of resources is indicated by the point where AC curve is at its minimum. In other words, the company should reduce its production level at the lowest point of AC curve in order to reduce its losses. This is because after this point the diminishing returns to factor sets in, which in turn indicates a fall in the output level.
As shown in the figure, the company is currently producing at Q2 level of output where it is incurring losses due to diminishing returns and over-utilisation of resources. Thus, in order to reduce its losses, it should reduce the output production to Q1 level of output indicating the minimum of AC along with optimum utilisation of resources.