Question regarding expansion of firms and diseconomies of scale?

Question

If the long run demand for a good is increasing and diseconomies of scale are being experienced, ought the firm build a bigger or smaller plant?

Nothing too in-depth, my microecons syllabus has currently taught short run and long run cost analysis (such as economies and diseconomies of scale and bureaucracy) and of course, the basics of econs (demand and supply theory) but we have yet to start on market structures etc or macroecons, so just explain in with more simple concepts please.

Answer 1

My friend owns a business that makes and installs granite countertops in people's homes.  If long run demand for granite countertops is increasing, he has the ability to sell more countertops than he currently does.  If he makes no changes, he will continue to make his current level of profit.  But no more.  If he changes his economies of scale (buys more granite-cutting machines, hires more workers) he will pay out more money for a short time. Then he will later make more profit later.  These different levels of production are the "economies of scale".  How big should he be?  Should he grow?  How fast?   These are all part of the economy of scale.

Answer 2

If a firm's average fixed costs cannot be covered, they should stay in business in the short-run. Maybe they can build a smaller plant, negotiate a lower price, etc.

If a firms variable costs cannot be covered however, they should close down immediately since there is no point in them staying in business. They are spending more on keeping the business running than they are making back. No firm operates at a loss, why should they.

Hope this helps.