Why Short Run Cost Curve Is U Shaped?
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 “U”-Shape.
