A Level Economics AQA Practice Exam

What are economies of scale?

1. Factors that raise production costs

2. Factors that cause average cost per unit to fall as output rises

3. Fixed costs that do not change

4. Costs associated with hiring additional labor

The correct answer is: Factors that cause average cost per unit to fall as output rises

Economies of scale refer to the cost advantages that a business can achieve due to an increase in the scale of production. When a company produces more units of a good or service, the average cost per unit typically decreases as output rises. This reduction in average costs can occur for several reasons, including spreading fixed costs over a larger number of units, improved operational efficiencies, and bulk purchasing discounts on materials. As businesses scale up their operations, they often find ways to optimize processes and resource utilization, contributing to the lower average costs. In this context, understanding economies of scale is crucial, as they can lead to a competitive advantage in the market. Companies that successfully achieve economies of scale may be able to offer lower prices or increase their profit margins compared to their smaller competitors.