CIMA Fundamentals of Business Economics (BA1) Practice Exam

Economies of scale happen when increasing production leads to a lower average cost per unit. A concrete way this occurs is through bulk purchasing: buying inputs in larger quantities often lets a firm secure discounts, reducing the cost per unit of output. This is a clear example of the cost advantages that come with scale. As output grows, fixed costs can be spread over more units and operations can become more efficient, further lowering average costs. While there are other sources of these gains (like more efficient use of machinery or specialized labor), the key idea is that higher production helps reduce the cost per unit. The statement about bulk discounts directly captures this effect, whereas alternatives describe rising costs, unchanged costs, or imply only large firms can benefit—none of which fit the concept as well.