Students will be able to draw and interpret an Average Total Cost (ATC) diagram to illustrate the presence of economies of scale and diseconomies of scale.
Key Concepts
Average Total Cost (ATC)
Economies of Scale
Diseconomies of Scale
Minimum Efficient Scale (MES)
Relationship between ATC, Marginal Cost (MC) and Total Cost (TC)
Definition of Average Total Cost
The average total cost is the total cost per unit of output:
\$ATC = \frac{TC}{Q}\$
where TC is total cost and Q is the quantity of output produced.
Step‑by‑Step: Drawing an ATC Curve
Label the vertical axis “Cost per unit (£)” and the horizontal axis “Quantity of output (Q)”.
Plot a series of points using the formula \$ATC = \frac{FC}{Q} + A \cdot C\$, where \$FC\$ is fixed cost and \$A \cdot C\$ is average variable cost.
Connect the points with a smooth, U‑shaped curve.
Identify the lowest point on the curve – this is the Minimum Efficient Scale (MES).
Draw a marginal cost (MC) curve that intersects the ATC curve at its minimum point.
Interpreting the ATC Curve
The shape of the ATC curve reflects how average costs change as a firm expands production:
Downward‑sloping segment (left of MES): The firm experiences economies of scale. Average costs fall because fixed costs are spread over more units and because of factors such as specialization, bulk purchasing, and better utilisation of plant and equipment.
Minimum point (MES): The firm is operating at the most cost‑efficient scale. Any movement away from this point raises average costs.
Upward‑sloping segment (right of MES): The firm encounters diseconomies of scale. Average costs rise due to factors such as managerial inefficiency, coordination problems, and over‑use of equipment.
Suggested diagram: ATC curve showing a downward‑sloping portion (economies of scale), a minimum point (MES), and an upward‑sloping portion (diseconomies of scale) with the MC curve intersecting ATC at its minimum.