Which term describes the reduction in average cost per unit as output increases due to spreading fixed costs?

• A. Economies of scale
• B. Diseconomies of scale
• C. Constant returns to scale
• D. Variable costs

Answer: (A)

Spreading fixed costs over more units lowers the average cost per unit, which is what economies of scale describe. Fixed costs stay the same regardless of output, like rent or machinery. When you produce more, those fixed costs are allocated across a larger number of units, driving the average cost down. This downward pressure on average cost continues as production grows, until other factors (like rising variable costs or capacity limits) come into play. In contrast, diseconomies of scale would push average costs up with larger output due to coordination problems, constant returns to scale keep average costs unchanged as inputs expand, and variable costs change with output rather than spreading fixed costs. So the correct term is economies of scale.