SSC Selection Post 2025 PYQ — Question 22

Correct Answer

Economies of scale

Explanation

Economies of scale refers to the economic principle where a business experiences cost advantages as it expands its level of production. As the total volume of output increases, the fixed costs (such as factory rent, machinery, and administration) are spread over a larger number of units. This dilution of fixed expenses, combined with operational efficiencies and bulk purchasing discounts, results in a lower average cost per unit.

Key Points

The primary driver behind economies of scale is the spreading of fixed costs over a greater volume of output, making mass production highly cost-effective.

It allows large-scale industries to lower their prices in the market, giving them a competitive edge over smaller businesses that operate with higher per-unit costs.

If a company expands beyond its optimum capacity, it may face 'diseconomies of scale,' where coordination challenges and inefficiencies cause the per-unit cost to rise again.

Additional Facts

Economies of scale can be internal (arising from factors within the unique firm, like specialized machinery or better financial terms) or external (arising from industry-wide growth, like improved infrastructure or a skilled regional labor pool).

In contrast, the 'Law of diminishing returns' states that adding more of a variable input to a fixed input will eventually yield progressively smaller increases in output.

'Opportunity cost' represents the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Important Questions

Question: What is the term used when a firm becomes too large and experiences an increase in per-unit costs instead of a decrease?

Answer: Diseconomies of scale.

Question: Which type of economies of scale occurs when an entire industry expands, leading to lower costs for all the individual firms within that industry?

Answer: External economies of scale.