The shape of the average-cost curve is determined by the relationship between total cost and the scale of output. The U-shaped average-cost curve which appeared in the traditional models of perfect competition and monopoly reflected the assumption that a firm would initially have access to economies of scale, but that after a time any further expansion of output would cause average cost to rise as diseconomies of scale set in.
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Notes and References
- 1.See, for example, R. S. Koot and D. A. Walker, Journal of Industrial Economics (Apr 1970) and A. A. Walters, Econometrica (Jan–Apr 1963). A summary is contained in Hawkins, Theory of the Firm, pp. 48–9.Google Scholar