Why is LAC Curve U-shaped?

Solution

Simply put, the U-shape of the LAC curve is the result of operation of returns to scale, i.e., a firm experiences increasing returns to scale (i.e. diminishing cost) in the beginning followed by constant returns to scale and then by diminishing returns to scale (i.e. increasing cost) (see Q. 3.7). It is explained below. Remember that increasing returns means decreasing costs and diminishing returns imply increasing costs. That is why law of diminishing returns is called as law of increasing costs and law of diminishing returns is called as law of increasing costs.

(i) It is because of increasing returns to scale (i.e., decreasing costs) that LAC curve declines initially when a firm expands production from small scale to large scale. (ii) When AC becomes lowest as a result of increasing returns, a firm experiences constant returns for a while. (iii) A further increase in the scale of output beyond a certain point results in diseconomies of scale. This leads to decreasing returns (i.e., increasing costs). It is because of decreasing returns to scale that LAC curve starts rising.

In short, LAC curve first declines due to economies of scale and then rises due to diseconomies of scale. This briefly explains the U-shape of LAC curve. U-shape of LAC curve, in turn, implies U-shape of LMC curve.

Some More Questions From Production And Costs Chapter

A new technique of production reduces the marginal cost of producing stainless steel. How will this affect the supply curve of stainless steel utensils?

For Daily Free Study Material Join wiredfaculty

Production And Costs

Why is LAC Curve U-shaped?

Some More Questions From Production And Costs Chapter

What effect does an increase in excise tax have on supply curve of product?

If a farmer grows rice and wheat, how will an increase in price of wheat affect supply curve of rice?

What is meant by market period?

How will an increase in number of firms shifts the market supply curve?

What is the shape of supply curve during very short (market period)?

What is the shape of supply curve during short or long period?

What is the price elasticity associated with a straight line supply curve passing through the origin?

Name three factors that can shift a supply curve.

Give two examples where technological progress leads to a shift in the supply curve.

A new technique of production reduces the marginal cost of producing stainless steel. How will this affect the supply curve of stainless steel utensils?

Mock Test Series

NCERT Sample Papers

Entrance Exams Preparation

Phone Number

Email Address

Location