What describes the cost advantages that occur as output increases and average costs fall?

• A. Diseconomies of Scale
• B. Fixed Costs
• C. Economies of Scale
• D. Marginal Cost

Answer: (C)

As output rises and the average cost per unit falls, this is economies of scale. The basic idea is that fixed costs, like rent and machinery, can be spread over more units, so each unit bears less of those costs. Plus, larger production can bring other efficiencies—mass production, bulk purchasing of materials, and benefits from workers becoming more skilled or processes being optimized as output grows.

Diseconomies of scale is the opposite: average costs rise with more output due to coordination or communication problems at larger sizes. Fixed costs are simply the costs that don’t change with output, not the change in cost per unit. Marginal cost is the cost of producing one more unit, which isn’t the same as the average cost falling as production expands.