DECA+ Business Management and Administration Practice Exam

Which economic concept states that the average cost of production decreases as a business expands?

1. Law of Diminishing Returns

2. Law of Supply

3. Law of Economies of Scale

4. Law of Demand

The correct answer is: Law of Economies of Scale

The concept that states the average cost of production decreases as a business expands is known as economies of scale. This phenomenon occurs because, as a company increases its production, it can spread its fixed costs over a larger number of goods, leading to lower costs per unit. Additionally, larger companies often gain bargaining power with suppliers, access to advanced technologies, and more efficient production processes, all of which contribute to reducing costs. Economies of scale can result in various efficiencies, such as bulk purchasing, where larger quantities can be purchased at a discount, and operational efficiencies, where increased production lead to better resource management. This overall reduction in costs can allow a business to either improve its margins or offer more competitive pricing in the market. In contrast, the law of diminishing returns refers to a situation where adding more of one factor of production, while keeping others constant, eventually yields lower per-unit returns. The law of supply discusses the relationship between price and quantity supplied, typically stating that as prices rise, the quantity supplied increases. Lastly, the law of demand explains how the quantity demanded of a good or service decreases as the price increases, reflecting consumer behavior rather than production costs.