What are economies of scale?

Economies of scale refer to the cost advantages that businesses experience when they increase their level of production. As a company produces more goods or services, the average cost of each unit typically decreases. This phenomenon occurs because fixed costs—such as rent, machinery, and salaries—are spread over a larger number of units, leading to a reduction in the total cost per unit produced.

Additionally, larger production volumes can lead to more efficient use of resources and the ability to negotiate better prices for raw materials due to bulk purchasing. Therefore, economies of scale play a crucial role in enhancing a company's competitive advantage, allowing it to lower prices or increase profit margins.

The other options focus on aspects that do not correctly capture the essence of economies of scale. For example, increases in production costs contradict the fundamental principle of economies of scale, which is about decreasing average costs. Reductions in labor costs may occur but are not intrinsic to the concept of economies of scale itself. Lastly, while fixed costs are relevant to the discussion, simply stating they do not change with output does not address the relationship between production levels and average costs.