When a firm increases all the factors of production by a factor and output increases by more than that factor. As a result the average cost for the firm will be falling as output exceeds inputs.
Below is an illustration of how a business would achieve increasing returns to scale. Assuming this firm only uses capital and labour as its inputs. A doubling of the capital and labour input leads to greater than doubling of output as well. Because the average cost is calculated by the total costs/output, if the costs are increasing slower than output, average costs fall over time.
