Which statement best describes the concept of economies of scale?

Which statement best describes the concept of economies of scale?

• A. It means total cost declines as output increases.
• B. All costs are fixed.
• C. All costs are variable.
• D. It means average cost falls as output increases.

Answer: (D)

Economies of scale means average cost per unit falls as output rises. As a firm increases production, fixed costs are spread over more units, making each unit cheaper. In addition, larger production allows bulk purchasing, better utilization of machinery, and greater specialization of workers, all of which boost efficiency and lower the cost per unit. It’s common for total costs to still increase with more output, but the cost per unit drops over a range of increasing production. Be aware that beyond some point, average costs can rise again due to diseconomies of scale (such as coordination problems or management inefficiencies). The other statements don’t capture this idea: total cost does not need to fall as output increases, and the long-run concept is about average costs changing with scale while some costs can be fixed or variable depending on the level of output.

Economies of scale means average cost per unit falls as output rises. As a firm increases production, fixed costs are spread over more units, making each unit cheaper. In addition, larger production allows bulk purchasing, better utilization of machinery, and greater specialization of workers, all of which boost efficiency and lower the cost per unit. It’s common for total costs to still increase with more output, but the cost per unit drops over a range of increasing production. Be aware that beyond some point, average costs can rise again due to diseconomies of scale (such as coordination problems or management inefficiencies).

The other statements don’t capture this idea: total cost does not need to fall as output increases, and the long-run concept is about average costs changing with scale while some costs can be fixed or variable depending on the level of output.