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Economic theory explains why, at least initially, larger firms have lower unit costs than comparable smaller firms. Declining unit costs mean that economies of scale are present over the initial range of outputs. The long-run ATC curve is falling.
What about diseconomies of scale?As output continues to expand, is there reason to believe that larger firms will eventually have higher average total costs than smaller ones? The underlying causes of diseconomies of scale are less obvious, but they do occur. As a firm gets bigger and bigger, beyond some point bureaucratic inefficiencies may result. Inflexible procedures tend to replace managerial genius. Innovation requires clearance from more levels of management and becomes more difficult and costly. Motivating the work- force, carrying out managerial directives, and monitoring results of plans are also more complex when the firm is larger, and principal-agent problems grow as the number of employees increases and more levels of communication and monitoring are needed.
Circumstances vary, so diseconomies of scale set in at lower levels of firm size for some kinds of firms than for others. For example, firms in the fast-food industry can be very large and remain efficient; economies of scale apparently outweigh the diseconomies, even for giants like McDonald’s. But in the fine-dining segment of the restaurant industry, the best restaurants seem to be small. Customers demand individual attention, and a constantly changing, innovative menu that takes advantage of the constantly changing array of locally available fresh ingredients, with consistently high quality as the only constant, is important. There are few truly gourmet restaurant chains because diseconomies seem to set in at a much smaller size at these firms. The bottom line for diseconomies of scale is this: for some firms, bureaucratic inefficiencies, principal- agent problems, difficulties with innovation, and similar problems that increase with firm size cause long-run average total costs to rise beyond some output level. However. there is considerable variation among industries and even among firms in the same industry concerning the precise output level at which diseconomies of scale begin to occur .
It is important to note that scale economies and diseconomies stem from sources different from those of increasing and diminishing returns. Economies and diseconomies of scale are long-run concepts. They relate to coriditioris of prodiictiori when all factors are variable. In contrast, increasing and diminishing returns are short-run concepts, applicable only when the firm has at least one fixed factor of production.

Do larger firms have lower minimum unit costs than smaller ones? The answer to this question depends on which industries are being considered. There is a sound basis, though, for expecting some initial reductions in per- unit cost from large-scale production methods.
Volume of output denotes the total number of units of a product that the firm expects to produce T.~here are three major reasons why planning a larger volume generally reduces, at least initially, unit costs: (1) economies accompanying the use of mass-production methods, (2) higher productivity as a result of     specialization and “learning by doing,” and (3) economies in promotion and purchasing.
Let‘s consider each of these factors.
Mass-production techniques usually are economical only when large volumes of output are planned, since they tend to involve large development and setup costs. Once the j    production methods are established, though, marginal costs are low. For example, the use : of molds, dies, and assembly line production methods reduce the per-unit cost of automobiles only when the planned volume is in the millions. High-volume methods, although cheaper to use for high rates of output and high volumes, will typically require high fixed costs and therefore cause unit costs to be far higher for low volumes of production. Large-scale operation also allows the specialized use of labor and machines. In a giant auto plant, hundreds of different jobs must be done, and many of them require a training period for each worker. In a small plant, the same worker might do ten or twenty of these jobs, so each worker would have a much longer, more costly training period. Even then, the worker doing so many tasks might never fully develop the same level of proficiency of the more specialized worker. Baseball players improve by playing baseball, and pianists by playing the piano. Similarly, the employees of a firm improve their skills as they experience “learning by doing” in their jobs.Even better, concentration on a narrower range of tasks can help workers discover or develop cost-reducing techniques. The result of greater size and specialization is often more output per unit of labor.
Large firms are also able to achieve lower costs by spreading fixed costs (like the costs of advertising, developing specialized equipment, and searching out and negotiating better input prices, for example) over many more units. For example, both McDonald’s and General Motors are able to spread these costs over a large number of stores and volume of sales. The cost advantages of scale come in many forms.