Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What shape does the short-run average cost curve typically have?

1. A straight line

2. A U-shaped curve

3. A horizontal line

4. A downward slope

The correct answer is: A U-shaped curve

The short-run average cost (SAC) curve typically has a U-shaped form due to the relationship between average costs and output levels in the short run. Initially, as production increases, the average cost per unit decreases. This phenomenon is often attributed to factors like economies of scale and the efficient utilization of fixed costs spread over a larger number of units. However, after a certain level of output, the short-run average cost begins to increase due to factors such as diminishing returns. This reflects that while increasing production, each additional unit may require more resources than the last, leading to higher average costs. The U-shape thus captures the average costs' decline at lower levels of production and the subsequent increase at higher levels, illustrating the trade-offs producers face in the short run as they change output levels. This makes the U-shaped curve a fundamental concept in cost theory and crucial for understanding production decisions and pricing strategies.