When a firm has time to expand or reduce the amount of capital and land it employs in its production, it may find its average, per-unit production costs either rising or falling with the amount of capital it uses. This phenomenon is known as economies of scale (or size).
Sometimes, the larger a firm becomes, the more it produces, the lower its average costs of production. On the other hand, it is possible for a firm to become too big for its own good, and experience diseconomies of scale: when producing more output leads to rising average costs.
This lesson distinguishes between a firm’s short-run average total cost and its long-run average total cost, and explains how economies of scale may help a firm achieve lower average costs as it increases its output in the long-run.