Question 12

Economies of scale indicate a reduction in average cost as production output increases.

As production output increases, economies of scale lead to a reduction in the average cost of each unit produced due to factors such as increased efficiency and the spreading of fixed costs over a larger number of units.

A) Economics of scale

This option is correct because economies of scale specifically refer to the cost advantages that businesses experience as they increase their level of production. Higher production levels typically reduce the per-unit cost due to efficiencies gained in production processes, purchasing, and technology.

B) Best operating level

This option is incorrect as the best operating level refers to the point at which a company achieves maximum efficiency and productivity without incurring excess costs. It does not directly imply a reduction in average unit costs with increased production but rather focuses on optimizing operations at a specific output level.

C) Diseconomies of scale

This option is incorrect because diseconomies of scale occur when a company grows too large and experiences an increase in per-unit costs. Factors such as management inefficiencies and communication problems can lead to higher costs, contrasting the concept of economies of scale.

D) Focused factories

This option is incorrect as focused factories refer to production facilities that concentrate on a limited range of products to enhance efficiency and reduce costs. While this strategy may lead to cost savings, it does not inherently imply a reduction in average costs due to increased output across a wide production scale.

Conclusion

Economies of scale is the only option that directly addresses the phenomenon where average costs decrease as production output increases. The other options either describe different concepts related to production efficiency or indicate scenarios that do not lead to cost reduction, thus confirming that A is the definitive correct answer.