U-shaped average cost curve

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A shape that is often assumed for the average cost curve. The U-shape can be justified by arguing that the productive process has some overheads or fixed costs that ensure at low levels of output average cost is high, and that there are some inputs which cannot be increased indefinitely, at least in the short run. When output is high, shortages of these inputs restrict the efficiency with which they can contribute to increased output. Thus at high levels of output marginal costs tend to be high, leading to increasing average costs. At some medium level or possibly range of output, average costs reach a minimum.

Subjects: Economics.

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