Cost advantages that businesses obtain due to the scale of their operation, with cost per unit of output decreasing as scale increases, are called?

• A. Economies of scale
• B. Diseconomies of scale
• C. Marginal cost
• D. Fixed costs

Answer: (A)

Economies of scale occur when the cost per unit falls as production scales up. This happens because fixed costs—such as rent, machinery, and setup—are spread over more units, reducing the average cost. Additional sources include bulk purchasing, better utilization of equipment, and labor or process efficiencies from specialization. As a firm grows, the long-run average cost curve typically slopes downward in the range where these efficiencies apply. If scale becomes too large, costs can rise again due to coordination problems or inefficiencies, known as diseconomies of scale. The other terms don’t describe this phenomenon: marginal cost is the cost of producing one more unit, and fixed costs are costs that don’t change with output.