Explain why the short run ATC is U shaped. Explain why the long run ATC is also U shaped. How are the two curves different?
As you produce more, you experience economies of scale, so ATC drops. At some point, you begin to experience diseconomies of scale, so ATC rises. In other words, when MC is below ATC, ATC is falling, but when MC is above ATC (after it crosses), ATC rises, thus the U shape. Long run costs have no fixed factors of production, while short run costs have fixed factors and variables that impact production.