Final answer:
A firm's long-run average total costs decline over a wide range of output due to economies of scale, which occurs when increased output leads to lower unit costs. This is the advantage large firms like Costco and Walmart have. Diseconomies of scale happen when a firm becomes too large, causing average costs to increase due to inefficiencies.
Step-by-step explanation:
A firm's long-run average total costs may decline over a wide range of output due to economies of scale. This concept refers to a situation where, as the quantity of output increases, the cost per unit decreases. It is central to production and cost theory in economics and explains how larger firms, such as warehouse stores like Costco or Walmart, can operate at a lower average cost than their smaller counterparts. Conversely, when firms grow too large and become inefficient, the situation is known as diseconomies of scale, where the long-run average costs start to rise with increased output.
Utilizing the least costly production technology and determining the optimal scale of production are crucial steps for a firm. When the scale of production is increased, fixed costs are spread out over more units of output, and variable costs may also benefit from bulk purchasing and other efficiencies. However, if a firm expands beyond a certain point, it may face management challenges and higher costs, leading to diseconomies of scale.