U-SHAPED COST CURVES: The family of short-run cost curves consisting of average total cost, average variable cost, and marginal cost, all of which have U-shapes. Each is U-shaped because it begins with relatively high but falling cost for small quantities of output, reaches a minimum value, then has rising cost at large quantities of output. Although the average fixed cost curve is not U-shaped, it is occasionally included with the other three just for sake of completeness.The U-shapes of the average total cost, average variable cost, and marginal cost curves are directly or indirectly the result of increasing marginal returns for small quantities of output (production Stage I) followed by decreasing marginal returns for larger quantities of output (production Stage II). The decreasing marginal returns in Stage II result from the law of diminishing marginal returns. The U-shaped cost curves form the foundation for the analysis of short-run, profit-maximizing production by a firm. These three curves can provide all of the information needed about the cost side of a firm's operation. Bring on the Curves
All three curves presented in this diagram are U-shaped. In particular, the production of Wacky Willy Stuffed Amigos, like other goods, is guided by increasing marginal returns for relatively small output quantities, then decreasing marginal returns for larger quantities. Consider a few reference points:
The Average-Marginal RelationThe average total cost, average variable cost, and marginal cost curves depict the basic mathematical relation that exists between any average and the corresponding marginal.
What About Average Fixed Cost?Although the average fixed cost curve is not displayed in this exhibit, average fixed cost can be derived from the average total cost and the average variable cost curves.First, note that the distance separating the average total cost curve and the average variable cost curve is relatively wide for small quantities of output, but narrows with greater production. The reason for the narrowing gap is that the difference between the two curves is average fixed cost. Because average fixed cost declines with greater production, so too does the gap between these curves. As such, average fixed cost can be derived from this diagram by calculating the vertical distance between the average total cost and the average variable cost curves. While an average fixed cost curve is sometimes included in a diagram such as this one, it is not really needed. So long the average total cost and the average variable cost curves are available, average fixed cost can be obtained. And What About the Totals?All total cost values--total cost, total variable cost, and total fixed cost--can also be derived from this diagram. If the output quantity, average total cost, and average fixed cost, are known, then the total cost measures can be derived. Total cost is quantity times average total cost. Total variable cost is quantity times average variable cost. And total fixed cost is quantity times average fixed cost.As such, this diagram of the three U-shaped cost curves provides all of the information available about the cost incurred by a firm for short-run production. Check Out These Related Terms... | marginal cost and marginal product | total cost and marginal cost | total cost curves | marginal cost and law of diminishing marginal returns | total variable cost and total product | Or For A Little Background... | marginal cost curve | average total cost curve | average variable cost curve | law of supply | short-run production analysis | law of diminishing marginal returns | marginal returns | marginal analysis | average-marginal relation | And For Further Study... | total cost | total variable cost | total fixed cost | marginal cost | average cost | variable cost | fixed cost | average total cost | average variable cost | average fixed cost | profit maximization | long-run average cost | opportunity cost, production possibilities | average product and marginal product | perfect competition, marginal analysis | monopoly, marginal analysis | monopolistic competition, marginal analysis | Recommended Citation: U-SHAPED COST CURVES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: September 23, 2024]. |