Explain the short-run cost curves and why the long-run average cost curve is U-shaped.

1. 1 · Define the cost concepts. Fixed, variable, total, average and marginal cost; explicit and implicit costs.
2. 2 · Show a cost table. Bakery: TFC Rs. 10,000; ATC falls to Rs. 5,400 at 5 batches then rises; MC lowest at 3 batches.
3. 3 · Draw the short-run curves. [Diagram: AFC falling; U-shaped AVC, ATC and MC; MC cutting AVC and ATC at their minima]
4. 4 · Explain the shapes.
   • AFC falls as fixed cost spreads
   • AVC, ATC, MC are U-shaped due to the law of diminishing returns
   • MC cuts the averages at their minimum
5. 5 · Introduce the long run. All inputs variable; LAC is the envelope of SAC curves.
6. 6 · Explain the U-shape of LAC.
   • Falling: technical, purchasing, financial, managerial and risk-bearing economies
   • Rising: coordination, communication and motivation problems (diseconomies)
7. 7 · Sri Lankan business link. Large retail groups gain purchasing economies; garment firms in export processing zones gain external economies.
8. 8 · Conclude. Short-run curves are shaped by diminishing returns; the long-run curve by economies and diseconomies of scale.

Scoring tip: Keep the two causes apart: diminishing returns explain the short-run U, economies of scale explain the long-run U.