Reasons for the 'u' shapes of short-run AC curve

The average cost curve of a firm in the short-run is 'U' shaped.The reasons for the 'U' shape of the short average cost curves are as follows :

1. Simple reason :The short run average cost curve is 'U' shaped due to nature of AFC and AVC curves as explained below.

• Fixed cost:The fixed cost is a constant quantity.The firm will have incur fixed cost even if the output is zero.Hence,the average fixed cost continuously fall as the output rises.On account of this,the average cost falls when output rises.
• Variable cost :The average variable cost varies with quantity output.In the beginning the average variable cost declines when the output increase.But beyond normal capacity,the average variable cost increase sharply.More output can be produced with more variable cost.With increase in output there is problems of over crowding,frequent breakdown of machinery.Consequently,average cost curve rises upwards as shown in the figure.