Economies of scale involve decreasing _ as output rises. profits. average cost. revenue
The Correct Answer and Explanation is:
Correct Answer: average cost
Explanation:
Economies of scale refer to the cost advantages that a firm experiences as it increases production. The key principle is that as output expands, the average cost per unit of output tends to fall. This happens because fixed costs, such as rent, machinery, and administrative expenses, are spread over a larger number of units. Therefore, each unit carries a smaller portion of these fixed costs.
In addition to fixed cost spreading, operational efficiencies also contribute. Larger production volumes may allow for more specialized labor, improved production techniques, and the use of more advanced machinery. Suppliers may offer bulk discounts, transportation can become more efficient, and certain functions, like marketing or legal services, can be centralized without a proportional increase in cost.
Economies of scale can be categorized into internal and external types. Internal economies of scale arise within the firm, such as technical efficiencies, managerial specialization, or financial advantages. External economies of scale occur due to factors outside the firm, such as industry growth, improved infrastructure, or the development of a skilled labor pool in a specific area.
It is important to distinguish economies of scale from increasing revenue or profit. Higher output can lead to higher total revenue, but revenue and profit depend on prices and market demand. A firm might experience economies of scale without necessarily increasing profit, especially if product prices fall or if the firm faces stiff competition. Thus, the core feature of economies of scale is the reduction in average cost as output increases.
However, beyond a certain point, diseconomies of scale may occur, where average costs begin to rise again due to inefficiencies, coordination problems, or resource limitations. Therefore, identifying the optimal scale of production is essential to maintain cost advantages.
