Why does the average total cost slope upward at the end?

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The average total cost (ATC) curve slopes upwards at the end because of the law of diminishing marginal returns.  At first, as production increases, a firm will become more efficient at producing a given good.  This will cause its ATC to drop.  However, at some point, the law of diminishing marginal returns comes into play and the ATC starts to increase once again.

In the short run, this happens because, at some point, a firm cannot work as efficiently when it tries to produce a larger quantity.  Let us imagine that I own a restaurant with a fixed kitchen size and fixed appliances.  I start out small, with only one or two people working in my kitchen.  Those two are trying to do all the work in my whole kitchen.  As business gets better, I hire more people.  The first few that I hire can really help me.  Each time I hire a new person, they fill in another empty spot in the kitchen.  They make it so each cook can specialize in one thing and can work exclusively in one area of my kitchen.  In essence, I create an assembly line. 

However, at some point, I have hired one cook for each space/task in my kitchen.  What happens if I try to produce still more food each day?  This is where the law of diminishing returns comes in.  I hire another worker for the kitchen, but my kitchen is not really big enough to give them a place to work.  They do not have an empty spot that they can fill.  They help as much as possible, but they do not add as much to our output as previous cooks did.  Because I tried to increase my output, I ended up lowering my marginal returns.

When marginal returns drop, ATC starts to rise.  I increase my costs by hiring more workers, but they do not create enough extra output to offset the wages I pay them.  Therefore, my average cost per unit of output (which is my ATC) rises.  This causes my ATC curve to slope upwards as output rises.

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