Long-run cost curves are U-shaped because

Question

Quizplus · Accepted Answer

Long-run cost curves are U-shaped because they take into account both economies of scale (which lead to lower costs as output increases) and diseconomies of scale (which lead to higher costs as output increases). At low levels of output, a firm may experience economies of scale as it benefits from specialization and can spread fixed costs over a larger quantity of output. However, at some point, the firm may experience diseconomies of scale as it becomes too large to manage efficiently or faces constraints in the availability of resources. This results in higher costs as output increases, leading to a U-shaped long-run cost curve. The law of demand and law of supply do not directly affect the shape of the long-run cost curve. The law of diminishing returns is relevant to short-run cost curves, but not long-run cost curves.

Long-Run Cost Curves Are U-Shaped Because