DECA+ Business Management and Administration Practice Exam

Which term describes a significant increase in production costs as output rises?

1. Law of Economies of Scale

2. Law of Diminishing Returns

3. Law of Supply

4. Law of Demand

The correct answer is: Law of Diminishing Returns

The correct answer describes the phenomenon where, after a certain point, adding more inputs (such as labor or materials) to the production process results in a smaller increase in output. This means that while initially, increasing production might lead to lower costs per unit (due to better utilization of resources), beyond a specific output level, the cost per unit begins to rise significantly. This is often due to factors like overcrowding, excessive handling, or coordination problems in the production process, which negatively impact efficiency. In the context of production, understanding this law helps businesses recognize the optimal level of production where costs are minimized before they start to escalate with increased output. This concept is a critical consideration for managers when planning production levels and resource allocation to ensure they do not push production beyond the point where costs begin to outweigh benefits. The other terms mentioned do not relate to the significant increase in production costs as output rises. The Law of Economies of Scale actually refers to the cost advantages gained as production increases, while the Laws of Supply and Demand pertain to market dynamics and pricing rather than production costs directly.