2 Does the law of diminishing returns apply to capital as well as labour? Explain why or why not. Economies of scale are features of a firm’s technology that make average total cost fall as output increases.

When economies of scale are present, the LRAC curve slopes downward. The LRAC in Figure 10.8 shows that Fashion First experiences economies of scale for outputs up to 15 jumpers a day.

Greater specialisation of both labour and capital is the main source of economies of scale.