What is meant by economies of scale?

Economies of scale refer to the cost advantages that a business experiences as it increases its level of production. Specifically, as production volume rises, the average cost per unit typically decreases. This phenomenon occurs for several reasons, such as spreading fixed costs over a larger number of units, acquiring inputs at reduced rates due to bulk purchasing, and enhancing operational efficiency.

With increased production, companies can utilize resources more effectively and often invest in better technology, which leads to greater efficiency. This reduction in the per-unit cost allows companies to improve their profit margins or reduce prices, making their products more competitive in the marketplace.

Other options do not accurately capture the concept of economies of scale. The first choice refers to increased debt, which is unrelated to the idea of reducing costs through higher production. The third choice speaks to fixed costs but does not address the cost advantages related to increased production volume. The last option mentions higher prices due to limited production, contrasting with the fundamental idea of economies of scale, which often involves lower prices due to reduced costs as production scales up.