Question

In the context of economies of scale, what do the terms "quantity" and "efficiency" refer to, and how do they relate to the cost of manufacturing each unit?

Answer 1

In the context of economies of scale, the terms 'quantity' and 'efficiency' refer to the quantity of output produced and the ability to produce more with the same resources, respectively. As the quantity of output increases, the cost per unit decreases due to economies of scale.

Step-by-step explanation:

Economies of scale refer to the situation where, as the quantity of output goes up, the cost per unit goes down. The term 'quantity' in the context of economies of scale refers to the quantity of output produced by a firm. As the quantity of output increases, the firm can take advantage of economies of scale and achieve lower average costs of production.

The term 'efficiency' in this context refers to the ability of a firm to produce more output with the same amount of resources. As a firm increases its scale of production, it can allocate its resources more efficiently, leading to lower costs per unit of output.

For example, if a factory produces 500 units of a product, the average cost of production per unit may be $10. However, if the factory increases its production to 1000 units, the average cost of production per unit may decrease to $8, indicating greater efficiency and economies of scale.