Question

What contributes to the typical U shape of the average total cost curve

Answer 1

Average Cost is cost of per unit of output produced by variable factor along with fixed factors.

Therefore, Average Cost is sum total of average fixed cost and average variable cost.

AC= AVC+ AFC

AC curve is shaped this is mainly because of Law of diminishing return. As we know there is inverse relationship between cost and production. As we produce more our per unit cost will decline.

Initially, there is significant fixed cost and variable cost in production therefore Average cost is high but as we produce more and more our total output will increase as a result per unit cost of production will start falling. Hence average cost is falling. After that a point will come it become minimum at that point our total output is maximum and finally after a point output will start falling as a result cost of production will increase and hence Average Cost will increase. Hence AC becomes U shaped.