in the size of the factory means that labour and other variable factors now
have more (or better) physical capital with which to work, and this
generally increases their average and marginal product, and thus reduces
marginal and average costs (at any given level of output). What is the
combined effect of these two forces?
The overall effect on the ATC curve is difficult to predict without having
more information about the firm’s technology. It depends on how much
the firm’s output rises when it increases its use of all factors. In other
words, we need to have more detailed information about the firm’s
production function before we know how a change in the firm’s plant size
will affect its ATC curve.
Changing from one plant size to another is considered by economists to
be a long-run decision by the firm. This brings us to the next chapter, in
which we explore how firms make decisions in a setting in which all
factors of production are variable.