AC curve is ‘U’ shaped because:
(a) In the initial stage, because of the increasing returns to a factor, MP tends to rise and (its inverse) MC tends to fall. Falling MC causes fall in AC as well.
(b) When there is a constant return to a factor this will imply a situation of constant MP and constant MC. Because of stable MC, AC also tends to stabilise.
(c) When there are diminishing returns to a factor MP starts declining (and its inverse) MC starts rising. Rising MC causes AC to rise. In brief, AC assumes its ‘U’ shape in accordance with the law of variable proportions.
