Average cost is usually U shaped. At first, the average cost is high due to large fixed cost and small output. As output increases, the fixed cost is thinly spread over the larger number of units produced, and the average cost accordingly falls. This is due to various internal economies and fuller use of indivisible factors. But when diminishing returns sets in due to difficulties of management and limitations of plants and space, the variable costs and therefore average costs start increasing. The lower end of the curve turns up and gives it a U shape. That is why average cost curves are U shaped.
