As a market increases in size, average total cost declines at each firm if the number of firms does not change.

Question

Quizplus · Accepted Answer

This is the concept of economies of scale. As production increases, fixed costs are spread over a larger output leading to a lower average total cost per unit. This happens until a certain point where further increase in production may lead to diseconomies of scale due to factors such as congestion or diminishing returns.

As a Market Increases in Size, Average Total Cost Declines