Question

Obtaining lower unit costs through the use of larger facilities is called ________.

1) Economies of scale
2) Economies of scope
3) Economies of size
4) Economies of production

Answer 1

Obtaining lower unit costs through the use of larger facilities is called economies of scale, where increasing production leads to a decrease in the cost per unit due to more efficient use of facilities and spreading of fixed costs.

Step-by-step explanation:

Obtaining lower unit costs through the use of larger facilities is called economies of scale. This term refers to the cost advantages that industries obtain when they increase production, leading to a decrease in the cost per unit. An example to illustrate this would be a small factory that produces 1,000 alarm clocks at an average cost of $12 per clock. If the factory is scaled up to a medium size and produces 2,000 clocks, the average cost may drop to $8 per clock. A further increase in scale to a large factory producing 5,000 clocks can reduce the average cost to $4 per clock, demonstrating the concept of economies of scale. These cost advantages are due to the more efficient use of production facilities and spreading fixed costs over a larger number of units.