Which statement best defines economies of scale?

• A. As output increases, average costs per unit rise due to spreading fixed costs.
• B. It means costs per unit stay constant regardless of output.
• C. It refers to the cost of producing the last unit only.
• D. As output increases, average costs per unit fall due to spreading fixed costs.

Answer: (D)

Economies of scale happen when producing more lowers the average cost per unit. The main driver is spreading fixed costs—like rent, equipment, and management—over a larger number of units, so the fixed cost portion per unit drops as output grows. That's why the statement that average costs fall as output rises because fixed costs are spread over more units best captures the idea.

The other descriptions don’t fit: costs per unit rising with more output would be diseconomies of scale; constant costs per unit would mean no change in average cost with scale; and focusing on the cost of the last unit points to marginal cost, not economies of scale.