U Shape of SAC

The short-run average cost curve (SAC) is U-shaped. As output increases the SAC first falls, reaches the minimum point and then rises giving it the shape of English letter U. What are the reasons for it?

As we know, SAC = AFC+ AVC. It follows that the behavior of SAC curve is determined by the behaviour of AFC & AVC curves. As output increases in the short-run. AFC & AVC curves. As output increases in the short-run. AFC curve slopes downwards. In the initial stage, AVC curve also slopes downwards because of the operation of increasing returns also known as the law of diminishing cost. As a result the SAC curve which is the vertical summation of the AFC & AVC curves also declines.

When the firm reaches the optimum size, the SAC curve reaches the minimum point. If the firm expands output further, the AVC curve sharply rises to the operation of diminishing returns, otherwise called the law of increasing costs. But the AFC curve continues to fall. The rise in AVC out weights the fall in AFC. The net result is that the SAC curve rises. This gives the SAC curve U-shape.