Why Long Run Average Cost Curve And Short Run Average Cost Curves?
Average cost curve is U-Shaped because of the economies and diseconomies of scale. The curve shows relationship between cost and quantity produced in short run (when labor is variable) and in the long run (when other factors of production are variable). When cost curve goes downward, it shows economies of scale i.e. Gains and efficiencies associated with efficient employment of factors of production. The point at which the curve becomes flat ( or straight after going downward) is the Minimum Efficient Scale. At this point average cost is minimum. After that, because of over employment of factors of production, average cost curve starts rising and results in diseconomies of scale. This explains the U-shaped curve of long run and short run average cost curve.
