When a firm has to increase its output,average total costs will decrease in the short run and then increase in the long run after the firm has time to add physical capital.

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In the short run, average total costs may initially decrease due to economies of scale, but as output continues to increase, average total costs may rise due to the law of diminishing returns. In the long run, firms can adjust all inputs, potentially leading to economies of scale that reduce average total costs, but eventually, diseconomies of scale might increase costs again.

When a Firm Has to Increase Its Output,average Total Costs