<P> A typical average cost curve will have a U-shape , because fixed costs are all incurred before any production takes place and marginal costs are typically increasing , because of diminishing marginal productivity . In this `` typical '' case , for low levels of production marginal costs are below average costs , so average costs are decreasing as quantity increases . An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum , after which point the average cost curve begins to slope upward . For further increases in production beyond this minimum , marginal cost is above average costs , so average costs are increasing as quantity increases . An example of this typical case would be a factory designed to produce a specific quantity of widgets per period : below a certain production level , average cost is higher due to under - utilized equipment , while above that level , production bottlenecks increase the average cost . </P>
<P> A typical average cost curve will have a U-shape , because fixed costs are all incurred before any production takes place and marginal costs are typically increasing , because of diminishing marginal productivity . In this `` typical '' case , for low levels of production marginal costs are below average costs , so average costs are decreasing as quantity increases . An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum , after which point the average cost curve begins to slope upward . For further increases in production beyond this minimum , marginal cost is above average costs , so average costs are increasing as quantity increases . An example of this typical case would be a factory designed to produce a specific quantity of widgets per period : below a certain production level , average cost is higher due to under - utilized equipment , while above that level , production bottlenecks increase the average cost . </P>
if marginal costs rises above average costs average costs must
if marginal costs rises above average costs average costs must
increasing as quantity increases
increasing as quantity increases