Question

In the short run, why does the Average Total Cost have a U-Shape? please use "bullet points".

Answer 1

* Average Total Cost (ATC) -: It refers to per unit cost of production which is calculated by diving total cost with number of unit of output.

AC = ( TC / Q )

* In short run due to presence of fixed factor total cost (TC) will have two components 1) Fixed Cost 2) Variable Cost.

* Therefore, in short run average cost will be sum of average fixed cost and average variable cost.

AC = ( TFC + TVC ) / Q

AC = AFC + AVC (where AFC= Average Fixed Cost and AVC = Average Variable Cost )

* Short run average total cost curve will be U shaped due to the following reasons -:

1. Due to increasing return in production average cost initially declines and due to diminishing return average cost increases.
2. Initially AFC & AVC both declines. So average cost also declines.
3. As output increases AVC starts rising but AFC continues to decline and decline in AFC is more than increase in AVC. So average cost continues to decline.
4. When output increases further then increase in AVC becomes greater than declining AFC. So average cost starts rising.

The above explanation is described graphically below -: