Which concept describes the cost benefits from increasing production volume?

• A. diseconomies of scale
• B. economies of scale
• C. economies of scope
• D. external growth

Answer: (B)

Economies of scale describe how average costs fall as output increases. When a company produces more units, fixed costs such as rent, management, and certain equipment are spread over a larger number of products, lowering the cost per unit. In addition, larger production runs can bring efficiencies like better use of machinery, specialized labor, and stronger bargaining power when purchasing inputs.

This concept is different from diseconomies of scale, where costs rise as output grows due to coordination problems or complexity. It also differs from economies of scope, which are cost savings from producing a variety of products together rather than increasing the volume of a single product. External growth refers to expanding a business through mergers or acquisitions, not the per-unit cost benefits gained from producing more units.