What are economies of scale?

Economies of scale refer specifically to the phenomenon where an increase in the scale of production leads to a decrease in long-run average costs. When a firm produces more, it can potentially spread its fixed costs over a larger number of goods or services, thereby reducing the average cost per unit. This can occur due to various factors, such as operational efficiencies, bulk purchasing of materials, and the ability to invest in more advanced technology.

As production scales up, the firm can often negotiate lower prices for inputs due to the larger volumes purchased and may also enhance productivity through the specialization of labor. These advantages collectively contribute to a reduction in the per-unit cost of production, making it a fundamental principle in understanding how businesses can achieve a competitive advantage.

In contrast, the other choices suggest concepts that do not accurately describe economies of scale. For instance, discussing increases in long-run unit average costs or maintaining constant average costs does not align with the definition of economies of scale. Furthermore, the mention of external factors harming production pertains to a different set of economic considerations. Therefore, recognizing economies of scale as a fall in long-run unit average costs from increased production scale is essential for grasping how firms can improve efficiency and reduce costs in the long term.