Western Governors University (WGU) ECON2000 D089 Principles of Economics Practice Exam

The average costs of production in the long run are significantly influenced by the size and structure of the firm. In the long run, firms can adjust all factors of production, which allows them to achieve economies of scale or face diseconomies of scale depending on how efficiently they manage their resources as they expand.

As a firm grows and increases its production, it may benefit from reduced average costs per unit due to factors such as bulk purchasing of inputs, improved operational efficiencies, or better utilization of resources. The organizational structure of the firm also plays a crucial role, as it determines how effectively management can coordinate production, streamline processes, and implement cost-saving technologies or practices.

While variable costs, raw material prices, and the number of competitors can influence costs in a period of production, these factors have less impact on average costs over the long term compared to the more systemic elements brought about by the firm’s size and structure. A larger firm may also diversify its production and spread fixed costs over a larger output, further impacting average costs positively when scaling up. Therefore, understanding how firm size and organizational structure influence costs is essential for analyzing average costs in the long run.