Suppose that a firm's long-run total cost curve can be expressed as TC=20Q2+20Q

Average total cost is total cost divided by the quantity of output, i.e.,

• [Math Processing Error]ATC=TCQ=20Q2+20QQATC=20Q+20

Note that average total cost in this case increases with the quantity of output, i.e., the more it produces, the higher the cost per unit. Hence, the firm is experiencing decreasing returns to scale.

Efficient Scale:

Efficient scale is the level of production where average total cost is at the lowest level. In the long run, firms will be producing at the efficient scale in a competitive market.