a) Economies and diseconomies of scale

economies of scale = cost advantages earned when a firm grows larger

• scale of production increases

• input increases < output increases

• cost of input < revenue from output

• ATC decreases

diseconomies of scale = cost disadvantages earned when a firm grows too large

• scale of production increases

• input increases > output increases

• cost of input > revenue from output

• ATC increases

increasing returns to scale → increase in input < increase in output

constant returns to scale → increase in input = increase in output

decreasing returns to scale → increase in input > increase in output