Explain why the average cost line will usually be U-shaped in the short run. (5 marks)

Fixed and Variable Costs: In the short run, a firm has both fixed and variable costs. Fixed costs are those that do not change with the level of output, such as rent or salaries. Variable costs, on the other hand, change with the level of output, such as raw materials or hourly wages.

Initial Decrease: When a firm starts producing, the average cost is high because the fixed costs are spread over a small number of units. As production increases, the average cost decreases because the fixed costs are spread over more units. This is known as economies of scale.

Minimum Point: The average cost continues to decrease until it reaches a minimum point. This is the point where the firm is most efficient, producing at the lowest possible cost per unit.

Subsequent Increase: After the minimum point, the average cost starts to increase. This is because the variable costs start to increase at a faster rate than the output. This could be due to factors such as overtime pay for workers or the need to buy more expensive inputs as the cheaper ones are used up. This is known as diseconomies of scale.

U-Shape: The combination of the initial decrease, the minimum point, and the subsequent increase gives the average cost curve its U-shape in the short run. The exact shape and position of the curve can vary depending on the specific costs and production processes of the firm.