Question

Explain why it can actually cost a firm less to produce more of something.

Answer 1

This situation is known as Economies of scale.

While total costs will increase with increase in production and output, average total cost may decrease as output increases. This is possible when the firm can purchase inputs at lower and lower rates, as production rises. This possibility arises when the firm is a very large one and so is able to get inputs at a bulk-purchase discount from suppliers, or is the only firm buying the inputs, therefore is in the better bargaining position with the supplier and is able to procure inputs at a lower price.