<P> Average cost is distinct from the price, and depends on the interaction with demand through elasticity of demand and an average cost due to marginal cost pricing . </P> <P> Short - run average cost will vary in relation to the quantity produced unless fixed costs are zero and variable costs constant . A cost curve can be plotted, with cost on the y - axis and quantity on the x-axis . Marginal costs are often shown on these graphs, with marginal cost representing the cost of the last unit produced at each point; marginal costs are the slope of the cost curve or the first derivative of total or variable costs . </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> <P> The long run is a time frame in which the firm can vary the quantities used of all inputs, even physical capital . A long - run average cost curve can be upward sloping or downward sloping at relatively low levels of output and upward sloping at relatively high levels of output, with an in - between level of output at which the slope of long - run average cost is zero . The typical long - run average cost curve is U-shaped, by definition reflecting increasing returns to scale where negatively sloped and decreasing returns to scale where positively sloped . </P>

If marginal costs rises above average costs average costs must