Question:
The economic phenomenon responsible for decrease in average costs of a firm in the beginning as a result of output expansion of the whole industry, is :
The economic phenomenon responsible for decrease in average costs of a firm in the beginning as a result of output expansion of the whole industry, is :
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Always look at the trigger of the cost reduction:
- Firm's own growth \(\rightarrow\) Internal.
- Industry's overall growth \(\rightarrow\) External.
- Cost decrease \(\rightarrow\) Economy.
- Cost increase \(\rightarrow\) Diseconomy.
- Firm's own growth \(\rightarrow\) Internal.
- Industry's overall growth \(\rightarrow\) External.
- Cost decrease \(\rightarrow\) Economy.
- Cost increase \(\rightarrow\) Diseconomy.
Updated On: Aug 5, 2026
- Internal economies of scale
- External economies of scale
- Internal diseconomies of scale
- External diseconomies of scale
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The Correct Option is B
Solution and Explanation
Step 1: Understanding the Concept:
This question tests the concepts of internal and external economies and diseconomies of scale.
These concepts explain how cost structures shift as production scales up at either the firm level or the industry level.
Step 3: Detailed Explanation:
Let us evaluate how changes in output affect average production costs:
- Economies vs. Diseconomies of Scale:
An increase in efficiency that leads to a decrease in average costs is referred to as an economy.
Conversely, an increase in average costs is a diseconomy.
- Internal vs. External:
Internal factors are specific to an individual firm and depend directly on its own decisions and growth (such as bulk buying discounts or specialization of labor).
External factors are industry-wide changes that affect all firms in that industry.
They are outside the direct control of any single firm but occur because of the growth and expansion of the whole industry.
In the question:
- The cost advantage is a "decrease in average costs" \(\rightarrow\) an economy of scale.
- This decrease is caused by the "output expansion of the whole industry" \(\rightarrow\) an external factor.
Therefore, the phenomenon is classified as External economies of scale.
Examples include the development of a shared transport network, cheap specialized labor pools, or research and development advances that benefit all local firms.
Step 4: Final Answer:
The phenomenon described is external economies of scale.
Therefore, the correct choice is Option (B).
This question tests the concepts of internal and external economies and diseconomies of scale.
These concepts explain how cost structures shift as production scales up at either the firm level or the industry level.
Step 3: Detailed Explanation:
Let us evaluate how changes in output affect average production costs:
- Economies vs. Diseconomies of Scale:
An increase in efficiency that leads to a decrease in average costs is referred to as an economy.
Conversely, an increase in average costs is a diseconomy.
- Internal vs. External:
Internal factors are specific to an individual firm and depend directly on its own decisions and growth (such as bulk buying discounts or specialization of labor).
External factors are industry-wide changes that affect all firms in that industry.
They are outside the direct control of any single firm but occur because of the growth and expansion of the whole industry.
In the question:
- The cost advantage is a "decrease in average costs" \(\rightarrow\) an economy of scale.
- This decrease is caused by the "output expansion of the whole industry" \(\rightarrow\) an external factor.
Therefore, the phenomenon is classified as External economies of scale.
Examples include the development of a shared transport network, cheap specialized labor pools, or research and development advances that benefit all local firms.
Step 4: Final Answer:
The phenomenon described is external economies of scale.
Therefore, the correct choice is Option (B).
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