Question

Economies of scale means that as output increases, per-unit (=average) cost of production _____.

1) Decreases
2) Increases
3) Remains constant
4) Cannot be determined

Answer 1

Economies of scale refers to the situation where the per-unit cost of production decreases as the output increases. This allows factories or firms to achieve cost savings and produce more efficiently. However, there is a limit to the benefits of economies of scale, as the average cost of production stops declining beyond a certain output level.

Step-by-step explanation:

Economies of Scale

Economies of scale refer to a phenomenon where the per-unit (average) cost of production decreases as the output increases. This means that as a factory or firm expands its scale of production, it can benefit from lower costs per unit.

For example, let's say a factory produces semiconductors. As the factory increases its production from, let's say, 10,000 semiconductors to 40,000 semiconductors, the average cost of production per unit will decline. This is because the fixed costs, such as rent or machinery, are spread over a larger number of units. Therefore, the factory can produce more efficiently and achieve cost savings.

However, beyond an output of 40,000 semiconductors, the average cost of production does not decline any further. This means that the factory has reached its optimal scale and cannot benefit from additional economies of scale.