Question on: JAMB Economics - 2024

A firm's average cost decreases in the long run due to increasing returns to scale.

• Increasing returns to scale: As the firm increases all inputs by a certain percentage, output increases by a larger percentage, lowering average costs.
• Diminishing average returns: A short-run concept; adding more of a variable input to a fixed input eventually leads to smaller increases in output, increasing average cost.
• Decreasing average fixed cost: While it decreases as output increases, it's not the primary reason for long-run decreases in average cost.
• Decreasing marginal returns: Short-run concept; adding more variable input leads to smaller output increases, increasing average costs.