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Recent developments in theory of costs have come to the following conclusion that is-

(i) U-shape of the short run cost curves seems doubtful due to its assumptions found not realistic.

(ii) Diseconomies are not necessary of large scale production, that means, most long run cost curves are L-shaped.

Modern theory of costs, like the traditional theory, distinguishes between fixed costs and variable costs in short run but it asserts that (i) average fixed cost curve (AFC) is not always necessarily rectangular hyperbola and (ii) average variable cost curve (AVC) has saucer type shape rather than a u-shape.

1. Average fixed cost curve (AFC):

It has been noted that in modern industrial enterprises, there always some reserve capacity in the plant, land and buildings. Administrative staff is hired a little more than the requirements so that some expansion of operations conducted by firm may be possible without undermining efficiency. It indicates that firm does not necessarily choose the plant which gives it lowest cost, as noted in the traditional theory. It prefers the plant which will allow it to maximum possible flexibility to expand output or to change its product or to change its techniques as response to changes in market conditions. In this situation, average fixed cost curves will be as shown in the following figure as follows- 

FIGURE-1 

As shown in above figure, the firm has two types of capital equipment - a large capacity plant and a small unit machinery. The large capacity plant sets an absolute limit to the short run expansion of output at point B, while the small unit machinery sets a limit to short run expansion of output at point A.

It clearly indicates that in the short run the firm can expand its output upto point B either by employing labour for longer hours or overtime basis or by obtaining some additional small unit of machinery. Here, in this case, the Average fixed cost curves will be CD and in the latter case the AFC curve will shift up and then it will fall again as shown by the curve EF as shown in above figure.

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