Business Degree Certification Practice Test

What does "economies of scale" refer to in a business setting?

1. The increased per-unit cost as production increases

2. The decreased per-unit cost as production increases

3. The constant cost of production regardless of scale

4. The fixed costs associated with production

The correct answer is: The decreased per-unit cost as production increases

"Economies of scale" refers to a situation in a business where the average cost per unit of production decreases as the volume of production increases. This phenomenon occurs because fixed costs, such as rent, machinery, and administrative expenses, are spread over a larger number of goods as production ramps up. Consequently, as companies produce more, they can often negotiate bulk purchasing deals and streamline operations, further reducing variable costs per unit. The concept is vital for businesses as it illustrates how scaling up operations can lead to cost savings and potentially lower prices for consumers. Understanding economies of scale helps businesses strategize on growth and efficiency, ultimately enhancing competitiveness in the marketplace.