Question

Suppose the production of a certain quantity of a good has a certain cost. Can you think of a situation in which producing more of the good costs less?

Answer 1

Answer

Yes. When producing more of a good costs less, it is called a situation of economies of scale.

Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.

For example-

Extraction of crude oil from the ocean bed requires heavy machinery (fixed cost), continuous operations (variable cost). The costs are so huge that the per unit cost can only be reduced if the crude oil is extracted in large quantities. Thus, when large quantities are extracted, Average Total Cost (ATC), sum of Avergae Variable Cost and Average Fixed Cost, reduces. This leads to economies of scale.