What do the short run marginal cost, average variable cost and short run average cost curves look like?
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What do the short run marginal cost, average variable cost and short run average cost curves look like?
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The short run marginal cost (SMC), average variable cost (AVC) and short run average cost (SAC) curves are all U-shaped curves. The reason behind the curves being U- shaped is the law of variable comparable. In the initial stages of production in the short run, due to increasing returns to labour, all the costs (average and marginal) fall. In addition to this in the short run MP of labour also enlarge, which implies that more output can be produced per additional unit of labour, leading all the cost curves to fall. Subsequently with the advent of constant returns to labour, the cost curves become constant and reach their minimum point (representing the optimum combination of capital and labour). Beyond this optimum combination, additional units of labour increase the cost, and as the MP of labour starts falling, the cost curve starts rising due to decreasing returns to labour.
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