Which economic concept explains how average costs per unit fall as production increases?

Which economic concept explains how average costs per unit fall as production increases?

• A. Economies of scale
• B. Diseconomies of scale
• C. Opportunity costs
• D. Sunk costs

Answer: (A)

Economies of scale describe why average costs per unit fall as production expands. When a firm increases output, fixed costs such as rent and management overhead can be spread over more units, lowering the cost per unit. At the same time, larger production enables more efficient use of machinery and specialized labor, bulk purchasing of inputs, and learning effects as workers and processes become faster and more efficient. This combination lowers average costs as output grows in the long run. If production grows very large, costs can rise again due to coordination or management challenges, but the concept here is about the decrease in average cost with increasing production. The other terms refer to different ideas: opportunity costs are foregone alternatives, and sunk costs are past expenditures that cannot be recovered.

Economies of scale describe why average costs per unit fall as production expands. When a firm increases output, fixed costs such as rent and management overhead can be spread over more units, lowering the cost per unit. At the same time, larger production enables more efficient use of machinery and specialized labor, bulk purchasing of inputs, and learning effects as workers and processes become faster and more efficient. This combination lowers average costs as output grows in the long run. If production grows very large, costs can rise again due to coordination or management challenges, but the concept here is about the decrease in average cost with increasing production. The other terms refer to different ideas: opportunity costs are foregone alternatives, and sunk costs are past expenditures that cannot be recovered.