What does U-shaped cost curve mean?
The average cost curve is u-shaped because costs reduce as you increase the output, up to a certain optimal point. From there, the costs begin rising as you increase the output. Average cost is defined as the total costs (fixed costs + variable costs) divided by total output.
What are the four basic cost curves?
Figure 8.1. 3 presents the four remaining short-run cost curves: marginal cost (MC), average fixed cost (AFC), average variable cost (AVC) and average total cost (AC).
What are the three total cost curves?
The three curves reflecting that total cost that is related to the short-run production are the total fixed cost curve, the total variable cost curve, and the total cost curve. The exhibit to the right can be used to display the three total cost curves.
What are the three important properties of cost curves?
Cost curves are a useful tool to analyze firm behavior. In most cases, we can observe three properties of cost curves: (1) The marginal cost curve eventually rises as output increases, (2) the average total cost curve is U-shaped, and (3) the marginal cost curve intersects the average total curve at its bottom.
Why AC AVC and MC are U shaped?
Answer: The MC curve intersects the ATC curve and the AVC curve at their minimum points. The ATC curve is U-shaped because ATC is the sum of AFC and AVC. The AVC curve is U-shaped because of decreasing marginal returns.
Why AC and MC curves are U shaped?
Both AC and MC are derived from total cost (TC). AC refers to TC per unit of output and MC refers to addition to TC when one more unit of output is produced. Both AC and MC curves are U-shaped due to the Law of Variable Proportions.
How is cost curve calculated?
Average total cost (ATC) is calculated by dividing total cost by the total quantity produced. The average total cost curve is typically U-shaped. Average variable cost (AVC) is calculated by dividing variable cost by the quantity produced.
What is the purpose of the cost curves?
In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve.
What is the relationship between MC and ATC?
The relationship between the ATC and MC. Whenever MC is less than ATC, ATC is falling. Whenever MC is greater than ATC, ATC is rising. When ATC reaches its minimum point, MC=ATC.
Why is short run average cost curve U shaped explain?
Short run cost curves tend to be U shaped because of diminishing returns. In the short run, capital is fixed. After a certain point, increasing extra workers leads to declining productivity. Therefore, as you employ more workers the marginal cost increases.
