Final answer:
Economies of scale occur when a firm's long-run average total cost decreases as its output increases, leading to cost advantages. Diseconomies of scale can occur when firms become too large, resulting in higher average costs. Understanding these concepts is essential for firms in managing growth and maintaining competitiveness. Thus, the correct option is C.
Step-by-step explanation:
Economies of scale refer to the phenomenon where the long-run average total cost of producing output decreases as the total output increases.
This happens because the fixed costs are spread over a larger number of units, and the firm may achieve greater efficiency through bulk purchasing, division of labor, and other cost-saving measures.
There can also be an opposite scenario known as diseconomies of scale, where the long-run average cost of producing output increases as total output increases, often due to issues such as overly complex management structures or communication challenges within very large firms.
A firm or a factory experiencing economies of scale will benefit from reduced costs per unit as production scales up, typically up to a certain point. After this point, diseconomies of scale may set in if the firm becomes too large and unwieldy.
In some economies, particularly planned economies, inefficiently large firms might not face the same pressures due to government intervention which negates competition and covers losses.
Therefore, the correct option is C.