It is the shape of the long run average total cost curve that will tell us about the economies or diseconomies of scale of a firm. Economies of scale occur when the long-run average total cost falls as the quantity of output increases. It can arise because high production levels permit for specialization among workers. Diseconomies of scale occur when the long-run average total costs rise as the quantity of output increases. It can arise due to coordination problems (that are a characteristic of any large organization).
Work Step by Step
We can observe both economies and diseconomies of scale on the same long-run average total cost curve, which is U-shaped. At low levels of production, the firm benefits from the increased size as it can take advantage of greater specialization. At high levels of production, the firm has already taken advantage of specialization and thus coordination problems now become more severe.