In modern economics the assumption is that marginal cost decreases for a while due to economies of scale, but then increases. It's a bit confusing, but consider this, at first you will devote the best resources to their best appropriate task. If you buy a factory, you'll buy the most cost effective factory and you'll hire the most cost effective people. As you expand, you'll have to maybe get another factory that may not be as well suited (if it were, you would have gone with it in the first place) and hire the second best person, and so on. This is called diseconomies of scale. Similarly, running organizations above a certain size creates plenty of inefficiencies that also contribute to increased marginal cost.

Both economies of scale and diseconomies of scale play a role. Think about it in the extremes. Would a company be able to produce 2x, 10x, 100x the product they currently produce now at the same per unit cost, or less? If not, then there must be some point at which the marginal cost is upward sloping.

I believe this is the reason that large companies don't necessarily lead innovation. For instance, a company like Facebook could have easily created a Snapchat, but it could not. It wasn't even successful imitating the product after several attempts (popularity, not functionality).

More: http://www.investopedia.com/exam-guide/cfa-level-1/microecon...