What is the relationship between economies of scale and the long run average costs?

The connection between economies of scale and long-run average costs is established through the understanding that as production increases, the average cost per unit of output generally decreases. This phenomenon occurs because fixed costs are spread over a larger number of goods, and operational efficiencies can be realized as firms ramp up production.

When a business expands its production, it often gains advantages like bulk purchasing of materials, optimized labor utilization, and improved operational technology, all of which contribute to lowering the overall average costs. As long as companies operate within their efficient scale, they can leverage these economies of scale to reduce costs and potentially increase profitability.

Thus, the correct response reflects the economic principle that increasing production typically results in lower long-run average costs, making it a fundamental concept in production and cost management strategies for businesses.