Why Short Run Cost Curve Is U Shaped?


4 Answers

Alex Wheeler Profile
Alex Wheeler answered
Usually, Short Run Cost Curves are U shaped because of something very simple: A company is experiencing diminishing and faltering returns. For example, let's say that the short-run capital is fixed, but after a certain point, the company decides to take on a whole new bundle of work but do not increase the workers, meaning the work quality suffers and production is delayed; this means productivity declines rapidly, causing the numbers (profit, turnaround, etc)  to drop. As the numbers drop, the cost curve begins to plummet on the graph, making that large 'dip' in the U shape short run cost curve and it remains this way for a while. The company sees this is an issue, so quickly employs 100 new workers which immediately helps with the workload and the productivity slowly returns to normal, before rocketing to the best it has ever been within the company. This then of course increases the numbers, so as the numbers and productivity increases, this makes the cost curve elevate, making the U shape form as things start to improve for the company. In short, in this situation, the cost curve shows a whole process, from succeeding, to slowly faltering, to production suffering (the dip), to the recognising of the problem (it starts to rise), then solving the problem (rises higher), to even more success.
Anonymous Profile
Anonymous answered
Short Run Cost curve is composed of Total Cost, Total Fixed cost and Total Variable Cost

Total cost = Total fixed cost + Total Variable cost

(Average cost x Quantity) = (Average fixed cost x Quantity) + (Average Variable cost x Quantity)

At first the Average Cost is too high due to large Fixed Costs and small outputs.

As output increases, the Average Cost accordingly falls.

When diminishing returns due to increasing variable cost, then the Average Costs start to increase

This gives the Short Run Cost Curve a “you”-Shape.

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