What refers to economies of scale?

Economies of scale refer to the cost advantages that a company experiences as it increases its level of production. When a business scales up production, it typically spreads its fixed costs over a larger number of goods, which leads to a reduction in the cost per unit of output. This means that the more you produce, the lower the cost of each individual unit becomes, making the business more efficient.

For example, a factory may have significant fixed costs, such as rent and machinery, which do not change regardless of how much it produces. As production increases, these costs are distributed across more units, reducing the average cost per unit sold. This concept is critical in competitive markets, as it can lead to a price advantage and increased profitability.

In contrast, the other options do not accurately represent the concept of economies of scale. Limited supply leading to increased prices pertains to market dynamics rather than cost efficiencies. Increased variable costs per unit suggests inefficiencies or rising costs with production rather than the cost savings seen with economies of scale. Fixed costs being unchanging with output describes a characteristic of fixed costs, but does not capture how they contribute to economies of scale when production increases.