**short‐run average total cost curve**(

*SATC*). The average total cost curve is just one of many

*SATCs*that can be obtained by varying the amount of the fixed factor, in this case, the amount of capital.

**Long‐run average total cost curve.** In the long‐run, all factors of production are variable, and hence, all costs are variable. The **long‐run average total cost curve ( LATC) **is found by varying the amount of all factors of production. However, because each

*SATC*corresponds to a different level of the fixed factors of production, the

*LATC*can be constructed by taking the “lower envelope” of all the

*SATCs*, as is illustrated in Figure

The *LATC* is shown to be tangent to each of five different *SATCs*, labeled *SATC* _{1} through *SATC _{5} *. In general, there will be a large number of

*SATCs*, each of which corresponds to a different level of the fixed factors the firm can employ in the short‐run. Because there is such a large number of

*SATCs*—more than just the five illustrated in Figure

*SATCs*, which makes up the

*LATC*, can be approximated by a smooth, U‐shaped curve.

**Economies of scale.** The U‐shape of the *LATC*, depicted in Figure *exceeds* the rate at which it increases its factor inputs. When this situation occurs, the firm's average total costs are falling, and the firm is said to be experiencing **economies of scale.**

At higher levels of output, the firm may find that its output increases at the *same* rate at which it increases its factor inputs. In this case, the firm's average total costs remain constant, and the firm is said to experience **constant returns to scale.** At even higher output levels, the firm's output will tend to increase at a rate that is *below* the rate at which it increases its factor inputs. In this situation, average total costs are rising, and the firm is said to experience **diseconomies of scale.**

The firm's **minimum efficient** scale is the level of output at which economies of scale end and constant returns to scale begin. The minimum efficient scale is indicated in Figure