Question

Benefits received from 'economies of scale' include?

1) Increased efficiency
2) Lower production costs
3) Higher profit margins
4) Improved market competitiveness

Answer 1

Economies of scale lead to a decrease in average cost per unit as output increases, providing several benefits like increased efficiency, lower production costs, higher profit margins, and improved market competitiveness.

Step-by-step explanation:

The concept of economies of scale refers to the benefit that arises when increased production leads to a reduction in the average cost of each unit produced. As a company scales up its output, the fixed costs are spread out over a larger number of goods, thereby decreasing the cost per unit. This benefit in terms of cost efficiency can lead to numerous advantages. These benefits include:

1. Increased efficiency: Larger production typically means that processes can be optimized, waste can be reduced, and technology can be utilized more effectively.
2. Lower production costs: As mentioned, spreading fixed costs over a larger output reduces the average cost per unit, making production more cost-effective.
3. Higher profit margins: With reduced costs per unit, companies can maintain or reduce selling prices while still enjoying increased profit margins.
4. Improved market competitiveness: By having lower costs, companies can offer lower prices or invest in quality improvements, making them more competitive in the marketplace.

As an example, a company like Walmart, through economies of scale, can procure and sell products at lower prices, passing the savings to consumers while maintaining profitability, which is a key component of their business model.