Economies of Scale vs Law of Diminishing Marginal Returns

Economies of scale occur when long-run average total cost decreases as output increases.

This happens due to factors like specialization, bulk purchasing, or more efficient technology as the firm expands. It leads to lower per-unit costs and gives larger firms a cost advantage in the market.

The law of diminishing marginal returns states that adding more of a variable input to fixed inputs eventually yields smaller increases in output.

As a firm adds workers to a fixed amount of capital, marginal product may rise at first but eventually falls. This causes marginal cost to rise, shaping the upward-sloping part of the cost curves. It applies only in the short run, when at least one input is fixed.