A Level Economics AQA Practice Exam

What is the result of economies of scale on average cost curves at low levels of output?

1. Cost per unit rises

2. Cost per unit falls

3. Cost per unit remains static

4. Cost per unit is variable

The correct answer is: Cost per unit falls

When a firm experiences economies of scale, the average cost of production tends to decline as output increases, particularly at low levels of output. This is because as production ramps up, firms can spread their fixed costs over a larger number of units. Moreover, they can take advantage of operational efficiencies, bulk purchasing of inputs, and enhanced bargaining power. At low levels of output, the costs associated with establishing production, such as equipment and overhead, are relatively high per unit since they are distributed across fewer goods. As production increases, the average cost decreases, which reflects the benefits of economies of scale, leading to more efficient production processes and reduced costs per unit. Thus, the correct understanding is that the cost per unit falls with increased output, especially from initially low levels.