The larger a firm, the lower its cost of production This statement explains the?

Step 1: Analyze the question The statement says that as a firm gets larger, its cost of production (usually cost per unit) falls. We need to find the economic concept that describes this.

Step 2: Explain the concept When a firm expands its scale of production, its average (per-unit) cost often falls. This is called economies of scale. It happens because of:

• Bulk buying of raw materials at discount
• Specialization of labour and machinery
• Cheaper financing, since large firms get loans at lower interest rates
• Spreading of overhead costs (marketing, administration) over more units
• Use of by-products

Step 3: Check each option

• A. Law of diminishing marginal returns: This says that when you add more of a variable input to a fixed input, the extra output eventually falls. It is a short-run idea and does not say that a larger firm has lower costs. ✗
• B. Economies of scale: Larger scale of production leads to lower average cost. This matches the statement exactly. ✓
• C. Law of comparative cost advantage: This is about international trade, where countries specialize in goods they produce at a lower opportunity cost. ✗
• D. Theory of division of labour: This is about breaking a job into specialized tasks. It is one cause of economies of scale, but it does not directly say that a bigger firm has lower costs. ✗

Step 4: Answer The correct answer is B. concept of economies of scale.

💡 Exam Tip: Whenever you see "bigger firm" or "larger scale" together with "lower cost", think economies of scale. If it says "adding more of one input while others are fixed", think diminishing returns.